Government debt has typically been viewed through the lens of a solid safe haven play. One sector that’s been getting a closer look lately is municipal bonds. Investors can add high yield to the muni mix with VanEck Vectors High Yield Muni ETF (HYD).

The fund seeks to replicate as closely as possible, before fees and expenses, the price and yield performance of the Bloomberg Barclays Municipal Custom High Yield Composite Index. The fund normally invests at least 80% of its total assets in securities that comprise the benchmark index.

The index is comprised of publicly traded municipal bonds that cover the U.S. dollar denominated high yield long-term tax-exempt bond market. Overall, HYD offers:

  • A High-Yield Muni Focus: Underlying Index comprised of highest-yielding municipal bonds with income generally exempt from federal taxes
  • Enhanced Liquidity Features: Index includes 25% BBB investment-grade exposure for enhanced liquidity
  • Diverse Sector Exposure and Low Default Rates: Index covers wide range of muni sectors and securities with historically low default rates

HYD’s expense ratio comes in at 0.35%, which hits around the categorical average. As of November 30, the fund has a 30-day SEC yield of 3.41%, a distribution yield of 3.66%, and a 12-month yield of 4.05%.

HYD Chart

High Interest in High Yield Munis

Pandemic or not, investors have been quick to hop on board the high yield muni train. Per a Wall Street Journal report, “Covid-19 is wreaking havoc on the market for risky municipal bonds. Investors desperate for tax-exempt yield are still piling in.”

“Fixed-income returns that come with a tax break have become so precious to affluent American households that they are willing to overlook a spike in defaults, growing reports of repayment trouble and contagion risks of communal living projects,” the article said. “The S&P Municipal Bond High Yield Index is now only about 1% lower than its pre-coronavirus pandemic level, despite falling 15% in March as global shutdowns roiled the market.”

Debt markets got a nice boost back in April when the Fed decided to backstop bonds, including corporates and munis. Per the WSJ report, investors since then have added “a net $10 billion to high-yield muni mutual and exchange-traded funds, bringing the total assets under management to $109 billion, according to Refinitiv.”

“We’ve come into this environment with a tremendous amount of liquidity and buying power,” said John Wiley, who manages Franklin Templeton’s California High Yield Municipal Fund.

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