Municipal bonds and the related exchange traded funds make for ideal destinations for income-hungry investors looking to avoid riskier assets when equity market volatility rises. For investors seeking higher yields in the municipal bond arena, the VanEck Vectors High-Yield Municipal ETF (CBOE: HYD) is a name to consider.
HYD seeks to replicate the performance of the Bloomberg Barclays Municipal Custom High Yield Composite Index. The fund is proving its worth this month as the muni ETF is higher by almost 1.20% while the S&P 500 is lower by nearly 5%.
Munis also help diversify fixed-income portfolios. Investors who typically follow the Barclays U.S. Aggregate Bond Index will not have municipal bond exposure, so a muni bond ETF can complement core fixed-income positions.
“With both muni funds and ETFs recording the best start to a year, in terms of inflows, since data were first recorded in 1992, high yield tax-exempt municipal bonds in particular have been popular, especially, we believe, amongst individual investors,” said VanEck in a recent note.
Inside HYD’s Strength
HYD, which yields 4.25%, is up more than 4% this year, outpacing the largest municipal bond ETF by about 80 basis points. Several factors explain HYD’s strength against its peer group this year.
“Municipal bonds, in general, continue both to display low volatility and boast strong credit quality,” said VanEck. High-yield tax-exempt municipal bonds, in particular, continue to boast a low default experience with high taxable equivalent returns. Continuing low muni bond issuance from state and local governments has led to strong demand and enhanced performance.”
Favorable fundamentals will continue to support the municipal bond market, especially for high-yield munis and related ETFs. Supporting the munis market, the robust demand and relatively low supply has helped bolster prices.
“The strong results for muni investors, and especially high yield muni investors, in the first quarter of 2019 are not only welcome, but also an affirmation of how important municipal bonds are to the core strategy of constructing an individual portfolio,” according to VanEck.
For more investing trends, visit our Tactical Allocation Channel.