Even against the backdrop of four interest rate hikes by the Federal Reserve last year, some municipal bond strategies and ETFs delivered solid performances.
Take the case of the VanEck Vectors High-Yield Municipal ETF (NYSEArca: HYD). HYD, one of the largest high-yield municipal bond ETFs, returned 2.20% last year, or more than double the gain posted by the widely followed S&P National AMT-Free Municipal Bond Index. HYD seeks to replicate the performance of the Bloomberg Barclays Municipal Custom High Yield Composite Index.
“2018 was a trying year for both equity and bond markets, with just a fifth of the Morningstar categories posting gains. Within that exclusive winner’s circle was the high-yield muni category, which returned just over 2%, making it the third best performing category for 2018,” according to Morningstar.
Munis also help diversify fixed-income portfolios. Investors who typically follow the Barclays U.S. Aggregate Bond Index will not have municipal bond exposure, so a muni bond ETF can complement core fixed-income positions.
What’s Next for Municipal Bonds?
The $2.3 billion HYD holds over 1,800 municipal bonds and has a 30-day SEC yield of 4.25%, or nearly 200 basis points above the 30-day SEC yield on the S&P National AMT-Free Municipal Bond Index.
HYD is up modestly this year, but there are some risks to consider with high-yield municipal bonds.