Traditional municipal bond exchange traded funds usually provide exposure to either investment-grade or high-yield bonds, not both, and many of these funds focus on just one duration category, be it short, intermediate or long.
The newly minted VanEck Vectors Municipal Allocation ETF (MAAX) brings a refreshed, tactical approach to municipal bond investing. MAAX, which debuted last month, is an ETF of ETFs, meaning its holdings are other municipal bond ETFs. That allows the new fund to mix credit qualities and durations.
MAAX is based off a proprietary model that incorporates momentum, along with both duration and credit risk indicators, to tactically allocate among selected VanEck Vectors Municipal Bond ETFs, which covers the full range of the risk/return spectrum in the munis market and includes five VanEck Vectors Municipal Bond ETF options.
“In most environments, investors are well compensated for taking duration and credit risk. However, there are times when credit risk or duration risk, or both, flare up,” said VanEck in a recent note. “During these periods, investors typically need a process for identifying these risks and then avoiding them. These ‘risk on’ periods are when we would seek to de-risk the portfolio by taking either less credit risk, less duration risk, or both.”
Of MAAX And Munis
Municipal debt and bond-related exchange traded funds have been used as a relatively stable fixed-income stream for many investment portfolios.
Since muni bond interest is exempt from federal taxes, muni ETFs are a good way for investors seeking tax-exempt income, especially those in higher tax brackets. Due to its tax-exempt status, the asset category is also best utilized in taxable accounts.
MAAX’s proprietary methodology allows the fund to manage duration and credit risk.
“We use objective, data-driven indicators to figure out when either credit risk or duration risk, or both, are high. When they are, we significantly reduce exposure to them,” according to VanEck. “These technical and momentum indicators assess price stability within bond prices, credit spreads, cross-asset correlations, and a whole plethora of risks in order to understand just how much credit and duration risk is in the municipal bond market. Then MAAX tactically allocates among our municipal bond ETFs based on the interest rate and credit opportunities.”
MAAX’s holdings include the VanEck Vectors High-Yield Municipal ETF (HYD ), VanEck Vectors AMT-Free Long Municipal Index ETF (MLN ), VanEck Vectors AMT-Free Intermediate Municipal Index ETF (ITM ) and the VanEck Vectors Short High-Yield Municipal Index ETF (SHYD ).
For more news on tactical investment strategies, visit our Tactical Allocation Channel.