ETFdb Logo
ETFdb Logo
  • ETF Database
  • Channels
    • Active ETF
    • Alternatives
    • Beyond Basic Beta
    • China Insights
    • Climate Insights
    • Commodities
    • Core Strategies
    • Crypto
    • Disruptive Technology
    • Dividend
    • Dual Impact
    • Emerging Markets
    • Energy Infrastructure
    • ESG
    • ETF Building Blocks
    • ETF Education
    • ETF Strategist
    • Fixed Income
    • Free Cash Flow
    • Future ETFs
    • Global Diversification
    • Gold & Silver Investing
    • Innovative ETFs
    • Institutional Income Strategies
    • Leveraged & Inverse
    • Managed Futures
    • Market Insights
    • Megatrends
    • Modern Alpha
    • Multi-Asset
    • Night Effect
    • Portfolio Strategies
    • Retirement Income
    • Richard Bernstein Advisors
    • Tax Efficient Income
    • Thematic Investing
    • Volatility Resource
  • Tools
    • ETF Screener
    • ETF Country Exposure Tool
    • ETF Sector Tracker Tool
    • ETF Database Categories
    • Head-To-Head ETF Comparison Tool
    • ETF Stock Exposure Tool
    • ETF Issuer Fund Flows
    • Indexes
    • Mutual Fund To ETF Converter
    • ETF Data for Journalists
    • ETF Nerds
  • Research
    • First Bitcoin ETF
    • ETF Education
    • Equity Investing
    • Dividend ETFs
    • Leveraged ETFs
    • Inverse ETFs
    • Index Education
    • Index Insights
    • Top ETF Sectors
    • Top ETF Issuers
    • Top ETF Industries
  • Webcasts
  • Themes
    • AI ETFs
    • Blockchain ETFs
    • See all Thematic Investing ETF themes
    • ESG Investing
    • Marijuana ETFs
  • Multimedia
    • ETF 360 Video Series
    • ETF Trends on Videos
    • ETF Trends on Podcasts
    • ETF Prime Podcast
  • Company
    • About Us
    • Swag Store
  • PRO
    • Pro Content
    • Pro Tools
    • Advanced
    • FAQ
    • Pricing
    • Free Sign Up
    • Login
  1. High-Yield Muni Bond ETFs May Be Oversold
News
Share

High-Yield Muni Bond ETFs May Be Oversold

Justin KuepperAug 10, 2015
2015-08-10

Puerto Rico’s default has put pressure on a number of high-yield municipal bond exchange-traded funds that hold positions in the island commonwealth, but the selling pressure may end up creating a unique buying opportunity for value investors.

Many high-yield muni bond ETFs have exposure to Puerto Rico – after all, the territory is offering high yields – but the amount of exposure varies greatly between funds. In some cases, closed-end funds have completely divested Puerto Rico bonds from their portfolios, which means they no longer have any exposure to the risks, but still suffer from the broader aggregate capital outflows from the asset class due in part to the island’s crisis.

Some of the most popular ETFs with exposure include (as of 8/7/2015):

Ticker SymbolExposure6-Mo. Performance12-Mo. Yield
Market Vectors High Yield Municipal Index ETF (HYD A-)2.90%-3.36%4.91%
SPDR Nuveen S&P High Yield Municipal Bond ETF (HYMB B+)8.80%-4.80%4.57%
Market Vectors Short High-Yield Municipal Index ETF (SHYD C+)5.10%-2.31%3.19%


Content continues below advertisement

High-yield muni bonds have also been suffering from the anticipated Federal Reserve rate hike later this year, which promises to increase bond yields and lower bond prices. These dynamics have taken a toll on many bond and bond funds in general, although mixed economic data has some analysts predicting that a rate hike may not happen until next year. Of course, that hasn’t stopped mutual fund outflows from taking a toll on muni bond prices (see Figure 1. below).

Figure 1.f Muni Bond Fund Outflows

So, why consider high-yield muni bonds at all?

High-yield muni bonds have some of the highest yields in the world, particularly for investors capable of realizing their tax benefits, while maintaining much lower default rates than comparably rated corporates. According to Morningstar, high-yield muni funds have average yields of between 4% and 5% – an impressive feat with 10-year Treasuries at 2.6% – but investors in the top income bracket could be receiving equivalent yields upwards of 7%.

Unlike corporate issuers, high-yield muni bonds won’t suffer as much from the monetary policy-related impact of higher interest rates, or from the impact of lower commodity prices. The Puerto Rico crisis may have a limited impact on some fund portfolios, but most funds are well-diversified and others have already divested their holdings in the island. But even then the impact will only be felt if there’s a full default at all – some politicians are hoping otherwise.

Finally, muni bond prices have taken a beating over the past year due to these concerns, which could mean that many of the risks are already priced in to the asset class – at least to some extent – creating the potential for yield and price appreciation.

That said, investors should still be very cognizant of the risks associated with investing in high-yield muni bonds and funds. There’s little doubt that a Puerto Rico default would negatively impact prices in the near-term, if it materializes, while higher interest rates are universally a negative for the entire fixed income space. While bonds in general may not be all that attractive, high-yield muni bonds may be worth considering for those seeking income.

Key Takeaway Points

  • High-yield muni bonds – and funds – have moved significantly lower over the past year amid concerns of Puerto Rico’s default and an interest rate hike.
  • The two major risk factors affecting prices remain uncertain to some extent, which means that investors may have overreacted.
  • High-yield muni bonds provide some of the highest yields in the world right now, while maintaining better credit quality than corporate or emerging market alternatives.

Disclosure: No positions at time of writing.

» Popular Pages

  • Tickers
  • Articles

Jan 30

Impact Bonds: Bumps in the Road Give Way

Jan 30

JRNY Rallies Over 16%

Jan 30

Focus on Free Cash Flow Over Tech Earnings With TTAC

Jan 30

Gain Exposure to GE HealthCare With RYH and CSD

Jan 30

Markets Dip, Anticipating Earnings and Fed Decision

Jan 30

Strong January for ARK Sees 3 Top-Performing ETFs

Jan 30

Time for Value? Watch AI-Backed Value ETF AIVL

Jan 30

China Gears Up To Boost Consumption

Jan 30

Fixed Income “Has a Huge Potential” to Outperform

Jan 30

Disruptive Commerce ETF BUYZ Goes Shopping

QQQ

Invesco QQQ Trust

SPY

SPDR S&P 500 ETF Trust

VOO

Vanguard S&P 500 ETF

VGT

Vanguard Information...

SMH

VanEck Semiconductor ETF

XLK

Technology Select Sector SPDR...

VTI

Vanguard Total Stock Market...

SOXX

iShares Semiconductor ETF

BLOK

Amplify Transformational Data...

META

Roundhill Ball Metaverse ETF


Content continues below advertisement

Loading Articles...
Help & Info
  • Contact Us
Tools
  • ETF Screener
  • ETF Analyzer
  • Mutual Fund to ETF Converter
  • Head-To-Head ETF Comparison
  • ETF Country Exposure Tool
  • ETF Stock Exposure Tool
  • ETF Performance Visualizer
  • ETF Database Model Portfolios
  • ETF Database Realtime Ratings
  • ETF Database Pro
More Tools
  • ETF Launch Center
  • Financial Advisor & RIA Center
  • ETF Database RSS Feed
Explore ETFs
  • ETF News
  • ETF Picks of the Month
  • ETF Category Reports
  • Premium Articles
  • Alphabetical Listing of ETFs
  • Best ETFs
  • Browse ETFs by ETF Database Category
  • Browse ETFs by Index
  • Browse ETFs by Issuer
  • Compare ETFs
Legal
  • Terms of Use and Privacy Policy
  • © 2023 VettaFi LLC. All rights reserved.
Follow ETF Database
Follow ETF Database

Advertisement

Is Your Portfolio Positioned With Enough Global Exposure?

ETF Education Channel

How to Allocate Commodities in Portfolios

Tom LydonApr 26, 2022
2022-04-26

A long-running debate in asset allocation circles is how much of a portfolio an investor should...

Core Strategies Channel

Why ETFs Experience Limit Up/Down Protections

Karrie GordonMay 13, 2022
2022-05-13

In a digital age where information moves in milliseconds and millions of participants can transact...

}
X