Municipal bond exchange traded funds have been a stalwart component of many fixed-income portfolios, and the construction of Continuing Care Retirement Communities, or CCRCs, may be a growing segment of the munis space as the baby boomer generation look to their golden years.
CCRCs make up about $34 billion worth of the municipal debt market, with the majority of these debt securities falling into the high-yield/unrated segment, Jim Colby, Portfolio Manager for VanEck, said in a research note.
“We expect this segment of the muni high yield market to continue to grow given the aging population in the U.S. and its increased need for residential healthcare options. In terms of market size, CCRCs are approximately the same size as the tobacco bonds segment within the muni high yield market,” Colby said.
To put this in perspective, the VanEck Vectors High Yield Municipal Index ETF (NYSEArca: HYD) includes an 18.6% tilt toward tobacco and the shorter duration VanEck Vectors Short High-Yield Municipal Index ETF (NYSEArca: SHYD) has a 10.4% position in tobacco.
As Colby mentioned, an aging population may support demand for CCRC funding. The U.S. elderly population is expected to almost double in the next 25 years, growing by almost 80% as the population of those over the age of 65 reaches 83.7 million by 2050.
“For many, living out the rest of their days in their own homes will not be an option. The decision, then, will be choosing between the options available. A CCRC is one of those options,” Colby said.
Continuing Care Retirement Communities combine many aspects of senior living solutions in a single location, including independent residential units where healthy seniors may live on their own, assisted-living units that provide some care and nursing beds for seniors requiring constant nursing care.
“For investors, as the U.S. gets older, the size of the market for municipal bonds used to finance the construction of CCRCs looks set both to increase, as more of them are built, and to offer interesting opportunities. The graying of American baby boomers, and the consequent increasing demand for CCRCs, is likely to result in greater issuance of both tax-exempt and taxable bonds in the coming years,” Colby added.
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