Take a deep breath and tune out the noise of recent market volatility and chatter about the non-action taken by the Federal Reserve (Fed). To me, the simple message that emerges is that over the long term (10 years in the example below) the municipal asset class has touched what I feel are two very important demands of many investors: low volatility and comparatively attractive returns, particularly on a taxable equivalent basis. Couple those elements with historically low default rates1 and one might say, “Oh yeah, munis have been generally steady, as advertised.”
As we enter the final quarter of the year and put behind us a Summer of Discontent, in which China devalued its currency, Greece tiptoed on the precipice of default, and the U.S. economic recovery continued enigmatically while investors hung upon every syllable the Fed uttered, it occurs to me that investors may want to revisit the potential benefits of the municipal asset class.
If doubt about the economy and movement of interest rates is creating uncertainty for investors, munis should be capable, in my opinion, of helping the undecided chart a near-term strategy. If comparative returns and lower relative volatility are important elements in one’s portfolio design, this chart might be helpful in providing one of those “Ah…ha” moments of discovery. Let’s get back to fundamentals while the rest of the world waits to see what happens.
Important Disclosure
Source: FactSet. As of August 31, 2015. Indices are unmanaged and are not securities in which an investment can be made. See below for index descriptions and an explanation of material differences between them. Past performance is not indicative of future results. Standard deviation is the statistical measure of the historical volatility of a portfolio. *Tax-equivalent return is calculated using the 39.6% highest effective federal tax rate. Results would have been substantially lower using lower tax brackets.
The chart shows the return of the Barclays Municipal Bond Indices on a tax-equivalent basis and compares such returns and standard deviations to other asset classes as represented by indexes. Fixed income investments have interest rate risk, which refers to the risk that bond prices generally fall as interest rates rise and vice versa. U.S. government bonds are guaranteed by the full faith and credit of the United States government. Municipal and corporate bonds are not guaranteed by the full faith and credit of the United States and carry the credit risk of the issuer. Municipal bonds are exempt from federal taxes and often state and local taxes. U.S. Treasuries are exempt from state and local taxes, but subject to federal taxes. Other securities listed are subject to federal, state and local taxes. Prices of equity securities change in response to many factors, including the historical and prospective earnings of the issuer, the value of its assets, general economic conditions, interest rates, investor perceptions and market liquidity. Prices of bonds change in response to factors such as interest rates and issuer’s credit worthiness, among others. Investing in smaller companies involves risks not associated with investing in more established companies such as business risk, stock price fluctuations, and illiquidity.
Van Eck does not provide tax advice or guidance. You should consult your own tax professional about the tax consequences of a particular investment.
The indices listed are unmanaged and do not reflect the payment of transaction costs, advisory fees or expenses that are associated with an investment in any Fund. An index’s performance is not illustrative of any Fund’s performance. Indices are not securities in which investments can be made.
1Source: Moody’s Investors Services; “U.S. Municipal Bond Defaults and Recoveries, 1970-2013”
Barclays Municipal Bond Index is considered representative of the broad market for investment grade, tax-exempt municipal bonds with a maturity of at least one year. The AAA and BBB indices are sub-sets of this broader index.Barclays U.S. Corporate High Yield Index is the Corporate component of the Barclays U.S. Credit index. The index includes publicly issued U.S. corporate and specified foreign debentures and secured notes that meet the specified maturity, liquidity, and quality requirements. To qualify, bonds must be SEC-registered. Barclays U.S. Credit IndexThe index measures the performance of investment grade corporate debt and agency bonds that are dollar denominated and have a remaining maturity of greater than one year. Barclays High Yield Municipal Bond Index is considered representative of the broad market for non-investment grade, tax-exempt bonds with a maturity of at least one year. Barclays U.S. Treasury Index is the U.S. Treasury component of the Barclays U.S. Government Index. The index includes public obligations of the U.S. Treasury with a remaining maturity of one year or more. S&P 500® Indexis widely regarded as the best single gauge of the U.S. equities market, including 500 leading companies in major industries of the U.S. economy. MSCI EAFE Index is comprised of the MSCI country indexes capturing large- and mid-cap equities across developed markets in Europe, Australasia and the Far East, excluding the U.S. and Canada.MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure the equity market performance of emerging markets.
by James Colby, Portfolio Manager
Colby is a Senior Municipal Strategist with more than 30 years of fixed income experience, responsible for Market Vectors municipal bond investments.