The Importance of Flexibility in the Municipal Bond ETF Space

Today’s interest rate environment puts a premium on flexibility – something not all bond strategies offer. That ability to evolve with the times is particularly important when it comes to municipal bonds.

The VanEck Vectors Municipal Allocation ETF (Cboe: MAAX) is up to the challenge.

MAAX 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 cover the full range of the risk/return spectrum in the muni market and includes five VanEck Vectors Municipal Bond ETF options.

“In late February, MAAX identified a higher interest rate risk. The Fund responded by reducing its interest rate sensitivity. It sold 10% of long duration bonds and re-allocated the proceeds to short duration bonds. The model effectively warned that higher interest rates were coming. The chart below illustrates the move in the yield of the 10-Year U.S. Treasury, which reached 1.74% last month. MAAX reduced duration when the yield was approximately 1.40%,” notes VanEck portfolio manager David Schassler.

MAAX 1 Year Total Return

The MAAXimum Response

Many investors are rightfully concerned about state budgets and the prospects for federal stimulus. There’s never been a better time to look for help from what has been a long-term, resilient asset class. In addition to rate risk, MAAX can be adjusted to address credit risk issues that may arise.

Municipal bonds are languishing amid the recent spike in Treasury yields, but that selling pressure could bring opportunities with exchange traded funds like MAAX.

“For April, MAAX reduced its exposure to short-duration bonds by 10% and re-allocated the proceeds to long-duration bonds,” adds Schassler. “The Fund had reduced its exposure to interest rate risk in March due to negative price momentum in long-dated bonds, high volatility in rates and strong negative correlations between interest rates and other asset classes. However, much of that risk has since subsided, with more normalized volatility in interest rates and more typical correlations across other asset classes.”

Municipal bonds have long been considered some of the most reliable fixed income options. Enter Covid-19 and a once untouchable space could now be in jeopardy with defaults. Nevertheless, MAAX and friends are proving steady amid a spate of new issuance.

“Interest rates appear to have stabilized. It is expected, based on the indicators, that we will remain range-bound in the near-term,” concludes Schassler. “Typically, large and rapid interest rate moves are mean-reverting. Therefore, it is likely that interest rates could continue to fall. However, it would not be surprising if interest rates gradually increased from the current level, based on the uptick in economic activity. As always, we will continue to closely monitor the situation.”

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