High-Yield Muni ETFs Will Continue to Shine

Favorable fundamentals will continue to support the municipal bond market, especially for high-yield munis and related ETFs.

“We believe market technicals to be especially supportive of the high yield market. As one of the few bright spots in fixed income globally, muni high yield performance this year has been of particular note,” Michael Cohick, Senior ETF Product Manager for Vaneck, said in a research note.

For example, the VanEck Vectors High Yield Municipal Index ETF (NYSEArca: HYD) rose 3.2% year-to-date, compared to the 1.1% decline in the Bloomberg Barclays U.S. Aggregate Bond Index and the 0.1% return for the Bloomberg Barclays Municipal Index.

Support for Munis Market

Supporting the munis market, the robust demand and relatively low supply has helped bolster prices. August is also expected to bring with it an estimated $51 billion in potential reinvestment demand from municipal bond holders.

“This means the supply/demand imbalance, in place for some time now, is likely in my view to continue to be favorable for municipal bond performance. We typically experience a larger disparity between supply and cash in June and July, but this year August looks set to present the larger imbalance,” Cohick said.

The high-yield, speculative-grade municipal bond segment has held up well this year, despite refinancings that removed a significant portion of bonds out of the high yield secondary universe. For instance, Cohick pointed out that tobacco issues that yield 7% and generate attractive income for yield investors, were called in California and New Jersey, which contributed to heightened pressure on any remaining high yield inventory and pushed up prices.

“We believe that these trends are positive indicators for the prospects of the high yield municipal bond sector,” Cohick added.

For more information on the muni bonds market, visit our municipal bonds category.