Municipal bonds are often viewed as low-risk investments and some market observers believe risk in the muni market is currently benign, potentially setting up opportunities with ETFs, such as the VanEck Vectors Municipal Allocation ETF (Cboe: MAAX).
MAAX, which launched earlier this year, is based off a proprietary model that incorporates momentum, along with both duration and credit risk indicators, to tactically allocate among selected VanEck Vectors Municipal Bond ETFs, which covers the full range of the risk/return spectrum in the muni market and includes five VanEck Vectors Municipal Bond ETF options.
Municipal bonds, also known simply as munis, are debt obligations issued by government entities. Like other forms of debt, when you purchase a municipal bond, you are loaning money to the issuer in exchange for a set number of interest payments over a predetermined period of time. At the end of that period, the bond reaches its maturity date, and the full amount of your original investment is returned to the investor.
Stable Fixed-Income Stream
Municipal debt and bond-related ETFs have been used as a relatively stable fixed-income stream for many investment portfolios.
Since muni bond interest is exempt from federal taxes, muni ETFs are a good way for investors seeking tax-exempt income, especially those in higher tax brackets. Due to its tax-exempt status, the asset category is also best utilized in taxable accounts. Current risk trends indicate it could be time to consider MAAX.
“Overall, the model indicates a period of low risk in the municipal fixed income market,” said VanEck in a recent note. “This is based on measurements of credit risk and duration risk independently. More specifically, the model measures risk by monitoring stability in price levels, volatility, and historical relationships. Right now, each of these key metrics within the municipal credit market point to near-term price stability.”
MAAX’s holdings include the VanEck Vectors High-Yield Municipal ETF (CBOE: HYD), VanEck Vectors AMT-Free Long Municipal Index ETF (CBOE: MLN), VanEck Vectors AMT-Free Intermediate Municipal Index ETF (CBOE: ITM) and the VanEck Vectors Short High-Yield Municipal Index ETF (CBOE: SHYD).
“While duration risk is also low, there are signs that this may be changing. Recently, yields have been rising. 10-year rates are up across major developed economies, including the U.S., Germany, and France. This had been putting downward pressure on bond prices,” according to VanEck. “The current duration risk score is 25, well below our systemic risk threshold of 50. Therefore, MAAX will maintain its overweight exposure to duration.”
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.