Evaluating a Municipal Bond Strategy Appropriate for Volatile Times

Like other corners of the fixed income market, municipal bonds encountered surprising amounts of volatility earlier this year. Investors looking to stick with the income proposition offered by munis while being tactical ought to consider 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.

“During periods of economic uncertainty, near-term decisions can determine the nature and durability of the recovery that drives long-term credit quality,” said VanEck portfolio manager Jim Colby in a recent note. “I believe there is some cause for optimism for recovery in the municipal bond market. There may be many bumps in the road, but fears of many Humpty-dumpty defaults really belong more in a story about Chicken Little.”

MAAX Matters Today

It almost seems like “safe haven bonds” has become a misnomer. Some of the safest debt, such as municipal bonds, are now causing its issuers to ask for help from the Federal Reserve amid the coronavirus outbreak, and it looks like their pleas will be answered.

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.

“The good news is that owing to the structural requirements of bond financings in the municipal space, issues that carry ratings from Moody’s, S&P and Fitch not only build reserves into each financing, but the ratings that are achieved are done so based, in part, upon the concept of ‘rainy day’ reserves set aside by the issuer to meet contingencies such as what we are now witnessing,” said Colby.

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.

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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.