Municipal bonds are usually viewed as conservative investments with lower yields on higher credit quality. Investors looking to add some spice to that trade without incurring much more risk should evaluate the VanEck Vectors High-Yield Municipal ETF (CBOE: HYD).
There are multiple reasons to consider municipal bonds, including tax benefits, decent yields and in many cases, benign credit risk. However, in today’s low-yield environment, the fair yields on some municipal bonds may not be enough for income-hungry investors. Enter HYD.
“Municipal bonds may allow investors to earn income free of federal, and potentially state income taxes,” said VanEck in a recent note. “Along with this tax preference on yield, muni bonds have historically had a very low risk of default, and muted bond issuance combined with historically strong demand has continued to drive performance.”
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.
Hone In On HYD
HYD, which has an effective duration of 6.33 years, holds nearly 2,100 bonds. Over 29% actually carry investment-grade ratings while just over 35% are rated junk. Another 35% aren’t rated.
“In municipal high-yield–and this is a little bit debatable on the part of certain people–but generally speaking, in the municipal world, most people think of BBB as being part of the high-yield muni universe,” said Morningstar in a recent note.
HYD 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, which is intended to track the overall performance of the U.S. dollar-denominated high yield long-term tax-exempt bond market. HYD is expected to pay monthly dividends.
Getting a higher yield and enhanced tax effects is significant to many investors, making municipal bonds especially enticing.
“We believe the tax-exempt status of high-yield municipal bonds continues to provide a compelling risk/reward profile,” adds VanEck.
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.