The events in the fixed income markets of the past several months may have left many municipal bond investors concerned, if not confused, about what to think and how to react.
Over the long term we could potentially be looking at higher interest rates as the new normal. With that in mind, I want to begin a discussion about ways one could seek to recalibrate a municipal bond investment strategy in the current investment reality. I believe investment-grade municipal bond investors may want to consider positioning their core muni holdings in intermediate maturities (6-17 year range) because:
- The intermediate muni index (LMT2TR) shown in the chart below has historically outperformed the short- and long-term muni indices.
- As shown in the chart below, long-term munis, e.g., those above 17 years, offered little extra yield in exchange for their generally higher sensitivity to rising interest rates — only 0.57% of additional yield from 17 to 30 years.
To access the intermediate part of the muni market, investors may want to consider an ETF of intermediate municipal bonds such as ITM®, Market Vectors Intermediate Municipal Index ETF. ITM’s underlying index, the Barclays AMT-Free Intermediate Continuous Municipal Index (LMT2TR), focuses on bonds with 6-17 year maturities.
James Colby is a portfolio manager and senior municipal strategist at Market Vectors ETFs.
The performance data quoted represents past performance, which does not guarantee future results. The investment return and principal value of an investment will fluctuate. An investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. ETF returns assume that dividends and capital gains distributions have been reinvested in the Fund at NAV.
The “Net Asset Value” (NAV) of a Market Vectors Exchange-Traded Fund (ETF) is determined at the close of each business day, and represents the dollar value of one share of the fund; it is calculated by taking the total assets of the fund, subtracting total liabilities, and dividing by the total number of shares outstanding. The NAV is not necessarily the same as the ETF’s intraday trading value. Market Vectors ETF investors should not expect to buy or sell shares at NAV.
Index returns are not Fund returns and do not reflect any management fees or brokerage expenses. Investors cannot invest directly in an Index. Returns for actual Fund investors may differ from what is shown because of differences in timing, the amount invested, and fees and expenses. Index returns assume that dividends have been reinvested.
1Performance is based on the following indices. The Barclays AMT-Free Short Continuous Municipal Index (LMT1TR), the underlying index of SMB, is a market value weighted index designed to replicate the price movements of short-duration bonds with a nominal maturity of 1-6 years. The Barclays AMT-Free Intermediate Continuous Municipal Index (LMT2TR), the underlying index of ITM, is a market value weighted index designed to replicate the price movements of medium-duration bonds with a nominal maturity of 6-17 years. The Barclays AMT-Free Long Continuous Municipal Index (LMT3TR), the underlying index of MLN, is a market value weighted index designed to replicate the price movements of long-duration bonds with a nominal maturity of 17 years or more. An index’s performance is not illustrative of any fund’s performance.