There are times when investors should seek flexibility with fixed income strategies, and 2021 is certainly one of those times. That’s particularly true of municipal bond funds.

Yields on standard investment-grade munis and the related passive strategies are still low, but excessive duration risk could leave investors vulnerable to an unexpected rise in long-term rates. The VanEck Vectors Muni Allocation ETF (MAAX)  is actively managed to adjust to credit and duration opportunities more swiftly while being more responsive to interest rate fluctuations than competing passive strategies.

Rising inflation also underscores MAAX’s flexibility and utility for investors that want some protection and added income from municipal bonds.

“This should make duration management top of mind for fixed income investors. We believe that MAAX is well situated to navigate this environment because it has the ability to reduce duration risk if interest rates do surge higher. Additionally, MAAX is earning a higher yield than its benchmark, which is another tool to combat inflation,” said VanEck portfolio manager David Schassler in a recent note.

MAAX sports a 30-day SEC yield of 2.63%, or 64 basis points ahead of the S&P National AMT-Free Municipal Bond Index.

MAAX Has the Right Mix

Last month, MAAX allocated 35.53% of its weight to high-yield municipal, with the rest split among long- and intermediate-term investment-grade debt. Holdings in the ETF include the VanEck Vectors Long Muni ETF (MLN), VanEck Vectors High Yield Muni ETF (HYD), and the VanEck Vectors Short High Yield Muni ETF (SHYD).

HYD and MLN were important drivers of MAAX’s solid May showing.

“Last month, long-duration IG bonds were the top performer and largest contributor to performance, followed by,” adds Schassler. “High yield bonds continued to perform well because of their economic sensitivity, the flurry of positive economic data points, and the positive economic outlook of the markets.”

Proving that flexibility is important, MAAX, which typically holds other VanEck muni bond ETFs, recently allocated to a trio of closed-end funds. Granted, those products combine for just 3% of MAAX’s weight. However, closed-end funds could potentially enhance MAAX’s income profile while presenting investors with some valuation opportunities because these funds can trade at noticeable discounts to their net asset values (NAVs).

Low rates are problematic for fixed income investors, and rising inflation compounds an already tricky bond environment, but MAAX can tap into duration and yield opportunities to help investors deal with trying circumstances, and closed-end funds are part of that toolkit.

For more news and information, visit the Beyond Basic Beta Channel.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.