Note: This article was written by Patrick Luby, complements of VanEck.
Using exchange traded funds (ETFs) to access the muni market can make it easier to maintain an appropriate and more comfortable level of risk in one’s “core” allocation than using individual muni bonds. Muni ETFs may also open up possibilities to take on incremental risk in a more liquid and broadly diversified way.
Most portfolio strategists recommend that the majority of a fixed income allocation consist of exposure to investment grade bonds, with exposure to high yield (non-investment grade bonds) limited to a subset of one’s fixed income allocation.
Investors may find using duration a more helpful guide to interest rate risk than maturity date. The tables below illustrate the durations of VanEck muni ETFs, as well as correlations, as a reminder that the benefits of diversification can vary, depending on the objectives and characteristics of each ETF.
The five ETFs in this first table may be a good way to start or replace some core fixed income exposure.
VanEck Muni ETFs for the Core
Investors seeking incremental income or those who are comfortable with lower credit quality may wish to consider supplementing their core holdings by using SHYD, HYD, or XMPT. Using an ETF for the higher risk portion of one’s fixed income allocation provides very broad diversification as well as intra-day liquidity. However, it’s important to remember that diversification alone does not necessarily assure a profit or a loss.