By David Schassler, VanEck Portolio Manager
The VanEck Vectors® Municipal Allocation ETF (MAAX) tactically allocates among VanEck municipal bond ETFs based on interest rate and credit opportunities to seek capital appreciation plus tax-exempt income. It uses a data-driven, rules-based process that leverages technical and macroeconomic indicators to guide credit and duration exposure, seeking to avoid market risks when appropriate. The expanded PDF version of this commentary can be downloaded here.
The VanEck Vectors Municipal Allocation ETF (“MAAX”) is currently yielding 2.91% vs. 1.86% for the Bloomberg Barclays Municipal Bond Index, as of September 30, 2019.1 For the month of September, MAAX returned -0.77% vs. -0.80% for the Bloomberg Barclays Municipal Bond Index. The recent weakness in the muni market is not overly surprising given its impressive performance in both August and year-to-date. Last month, high yield, short duration high yield and short duration investment grade muni bonds held up the best. The largest losses were experienced in long and intermediate duration investment grade municipal bonds.
Muni Risk Factors
Risk remains somewhat elevated in the municipal fixed income market. This risk is most evident in the heightened volatility of the U.S. 10-Year Treasury Note. In aggregate, the model is measuring an elevated level of credit risk and low duration risk. The risk is scored from 0 to 100. A score below 50 implies that risk is low and a score of 50 or higher implies that risk is high. The current credit risk score is 25 and the current duration risk score is 0. Since both of these scores are below our systemic risk threshold of 50, MAAX will maintain its overweight credit and duration risk positioning.
Credit Total Risk Score
The factors that determine the total level of both credit and duration risk are momentum, volatility and mean reversion. The scoring methodology works the same here. Scores below 50 are bullish and scores 50 or higher are bearish. The trend risk score is bullish for both credit and duration risk given the recent strength in bond prices.
Credit Trend Risk Score
The volatility risk factor is signaling caution for both credit and duration. High volatility is being measured in the 10-Year U.S. Treasury Note. It is a key measure of risk because it gauges investor sentiment. The current volatility risk score is 50 for credit and 25 for duration.
Credit Volatility Risk Sore
Mean reversion risk seeks to identify divergences in typical fixed income relationships. One of our key mean reversion metrics, the ratio of municipal yields to Treasury yields, is at an extreme. This has resulted in the credit mean reversion risk score remaining elevated at a score of 25. The duration mean reversion risk remains low with a score of 0.
Credit Mean Reversion Risk Score
The high risk regime has been registered by MAAX, but risks are not yet high enough to be considered systemic. Therefore, MAAX will continue to take both credit and duration risk in the pursuit of yield.These risks will be monitored closely and MAAX’s exposures will be adjusted if the risk environment changes materially.
Click here for performance as of the most recent month end.
130-day SEC yield for MAAX was 3.23% (unsubsidized 0.53%) as of 9/30/19.
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Bloomberg Barclays Municipal Bond Index is considered representative of the broad market for investment grade, tax-exempt municipal bonds with a maturity of at least one year.
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