Muni Bond Downturn Could Spell Opportunity for Investors | ETF Trends

In a normal interest rate environment, municipal bonds and the related exchange traded funds are bedrocks for many conservative income investors, but 2022 is proving to be anything but normal when it comes to interest rates.

Halfway through the year, the Federal Reserve boosted rates by 1.5% with more to come — moves that are plaguing multiple corners of the bond market, including munis. If there’s an upside to what’s currently a mostly downbeat situation, it’s that the 2022 muni slump could be creating opportunity for income investors.

An efficient avenue for tapping into that opportunity set with ETFs is via the VanEck Vectors Muni Allocation ETF (MAAX). MAAX, which turned three years old last month, employs a fund of funds structure, holding other municipal bond ETFs as well as muni closed-end funds.

“The question lingering in many investors’ minds today is the age old one: are we there yet? While answering that question definitively is impossible, we do believe there are signs of stabilization and light at the end of this tunnel. With municipal yields at 10-year highs, we’ve started to see the market rally. There may be more ahead,” according to Goldman Sachs Asset Management (GSAM).

MAAX, which currently holds 20 ETFs and closed-end funds, could have some tailwinds that aren’t yet fully recognized by investors, particularly if municipal bond supply remains light.

“One reason is that market technical factors such as issuance and coupon payments have historically lent support in the summer months. We estimate $45.9 billion in coupon payments will hit the market from June through August. At the same time, we expect net new issuance to be negative, reducing supply for at a time when those coupon payments will need to be reinvested and $127 billion of bonds are called or are set to mature,” added GSAM.

Another point in favor of MAAX is diversity. The VanEck ETF leverages the fund of funds strategy to provide investors with exposure to a variety of duration and credit exposures, including high yield fare. Adding to the allure of MAAX, which sports a 30-day SEC yield of 2.73%, is that state and local finances are mostly sturdy, indicating that credit risk is low with the fund. Nearly 72% of MAAX holdings carry investment-grade ratings.

“Also, credit health remains strong despite recent market volatility, bolstered by positive economic growth that has lifted tax revenues for states and local governments. Rainy day fund balances have swelled and the extra cash has led municipalities to meet their necessary pension contributions. For fiscal year 2022 rainy day balances are $100 billion, just shy of the record set for fiscal year 2021,” concluded GSAM.

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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.