Written by: David Schassler
The VanEck Vectors® Muni 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® Muni Allocation ETF (MAAX®) had a NAV total return +1.00% vs. +0.61% for its benchmark for the month. The 30-Day SEC Yield for MAAX is 2.79% and the taxable equivalent 30-Day SEC yield, assuming the highest federal tax rate of 37%, is 4.43%.
The results are in and the Democrats have swept Georgia. This means that President-elect Biden’s tax plan is more likely to become a reality. This is the tax plan, if enacted, that calls for raising taxes on the wealthy, which in turn would likely increase the demand for tax-exempt income. That is where muni bonds come in. Other than higher taxes, the Democratic control of the U.S. Senate will make it more likely for federal aid to make its way to the state and local governments that most need it. This would be a clear win for financially struggling municipalities and the investors who back them. There is also the potential for more infrastructure projects, which is yet another positive for the municipal bond market.
December was another great month for MAAX, as it continued to benefit from strong demand for muni bonds. The chart below illustrates the performance of each holding. As you can see, its top performing positions were in high yield, with the VanEck Vectors® High Yield Muni ETF (HYD®), a 30% allocation within MAAX, and the VanEck Vectors® Short High Yield Muni ETF (SHYD®), a 5% allocation within MAAX, share prices returning +1.36% and +0.82%, respectively. MAAX’s other investments in intermediate and long duration investment grade bonds also performed well, with the VanEck Vectors® Intermediate Muni ETF (ITM®), returning +0.55% and the VanEck Vectors® Long Muni ETF (MLN®), returning +0.38%.
MAAX entered January with a 35% allocation to high yield, 35% allocation to investment grade long duration and 30% allocation to intermediate-term investment grade. We believe that this positioning allows MAAX to continue to balance both the risks and rewards of the municipal bond market.
The next section highlights the risk factors that led to this positioning.
† Returns less than a year are not annualized.
Expenses: Gross 0.38%; Net 0.38%. Van Eck Associates Corporation (the “Adviser”) will pay all expenses of the Fund, except for the fee payment under the investment management agreement, acquired fund fees and expenses, interest expense, offering costs, trading expenses, taxes and extraordinary expenses. Expenses are based on estimated amounts for the current fiscal year. Cap excludes acquired fund fees and expenses, interest expense, trading expenses, taxes and extraordinary expenses.
The table presents past performance which is no guarantee of future results and which may be lower or higher than current performance. Returns reflect temporary contractual fee waivers and/or expense reimbursements. Had the ETF incurred all expenses and fees, investment returns would have been reduced. Investment returns and ETF share values will fluctuate so that investors’ shares, when redeemed, may be worth more or less than their original cost.
* 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.
Muni Risk Factors
The model that determines the allocations for MAAX considers this to be a stable risk regime as it relates to the two key risks taken by municipal bond investors: credit and duration. It measures risk via price levels, volatility and historical relationships. Risk is scored from 0 to 100. A score of 50 or lower implies that risk is low and a score of 50 or higher implies that risk is high.
The risk score for credit remains 0. All of the credit indicators in the model, which are designed to measure periods of heightened credit risk, remain bullish. This suggests that there is likely to be continued near-term stability in the credit markets.
Credit Total Risk Score
The risk score for duration remains at 0. Muni yields have been remained stable, regardless of rising Treasury yields, due to strong demand.
Duration Total Risk Score
In conclusion, we believe that the environment will continue to be favorable for the municipal bond market and this is being confirmed by the indicators that drive the allocations within MAAX. Therefore, MAAX will continue to be positioned overweight both credit and duration relative to its benchmark in order to take advantage of the opportunities.