The recent spike in Treasury yields is presenting challenges for some traditional municipal bond strategies. Investors can turn to a more responsive approach with the VanEck Vectors Municipal Allocation ETF (Cboe: MAAX).
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 covers the full range of the risk/return spectrum in the muni market and includes five VanEck Vectors Municipal Bond ETF options.
“The model that informs MAAX’s allocations is now identifying higher interest rate risk,” writes VanEck portfolio manager David Schassler. “This results from the rapid rise in interest rates, increased correlations between bond prices and stock prices and an uptick in the volatility of interest rates. MAAX responded by reducing its interest rate sensitivity. It sold 10% of long duration bonds and re-allocated the proceeds to short duration bonds.”
Municipal bonds have long been considered some of the most reliable fixed income options.
Municipal bonds, 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.
“Interest rates continued to rise at a rapid rate in February. Since the beginning of the year, the yield on the U.S. 10-Year Treasury note increased from 0.91% to more than 1.50%,” according to Schassler. “This put downward pressure on municipal bonds, particularly those with longer durations. Interest rates are rising due to unprecedented monetary and fiscal policy support combined with the expectations of higher economic growth.”
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.
For more on income strategies, visit our Retirement Income 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.