The municipal bond market is evolving and some index funds and ETFs have kept pace with that evolution. One that really has is the VanEck Vectors Municipal Allocation ETF (Cboe: MAAX).
MAAX, which launched last year, 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.
“Some segments of the market lend themselves better to indexing than others. For the advantages of a passive approach to hold, the costs of replicating an index must be minimal,” said Morningstar in a recent note. “These costs will vary depending on a variety of factors, including the breadth, depth, liquidity, and standardization of the market segment in question. The cost of indexing a broad, deep, liquid and standardized asset class like U.S. large-caps is low. The cost of building an indexed portfolio of a narrow, shallow, illiquid, and nonstandardized asset class like municipal bonds is relatively higher.”
By holding the VanEck Vectors High-Yield Municipal ETF (CBOE: HYD), VanEck Vectors AMT-Free Long Municipal Index ETF (CBOE: MLN), VanEck Vectors AMT-Free Intermediate Municipal Index ETF (CBOE: ITM) and the VanEck Vectors Short High-Yield Municipal Index ETF (CBOE: SHYD), thereby giving investors exposure to thousands of muni bonds, MAAX is able to source robust liquidity.
Since muni bond interest is exempt from federal taxes, muni ETFs are a good way for investors seeking tax-exempt income, especially those in higher tax brackets. Due to its tax-exempt status, the asset category is also best utilized in taxable accounts. Current risk trends indicate it could be time to consider MAAX.
“Additionally, advances in technology have improved liquidity in the fixed-income markets, which has made them easier to index,” notes Morningstar. “The price of liquidity in a market is often measured by the difference between the price at which a seller is willing to sell (the asking price) and a buyer is willing to buy (the bid price), which is known as the bid-ask spread. According to a study published by the MSRB in 2018, the average spread involved in a municipal bond transaction declined by more than 50% from 2005 to 2018. The MSRB found marketwide technological advancements were the main driver of this improvement.”
MAAX has a 30-day SEC yield of 3.20% and an expense ratio of 0.38%, which is reasonable considering the fund’s broad exposure.
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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.