Market Overview

With Muni ETFs, Focus On Fundamentals

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With Muni ETFs, Focus On Fundamentals

The combination of interest rates remaining lower for longer and investors demanding more income and yield have been driving forces behind the resurgence of municipal bond exchange-traded funds this year.

The Case Of The Munis

Municipal ETFs have been popular destinations this year as investors have continued hunting for a yield, a search that has stoked interest in longer duration fare as the Federal Reserve has consistently put off raising interest rates. That theme is benefiting ETFs such as the $2.4 billion VanEck Vectors High-Yield Municipal Index ETF (Market Vectors ETF Trust (NYSE: HYD)).

Related Link: VanEck Bolsters Muni ETF Lineup With 2 Additions

HYD's performance has also been impressive when considering there were some concerns about the possible effects of low oil prices on municipal bonds issued by major oil-producing states. The ETF holds nearly 1,380 bonds, but its largest weight to a big oil state is 7.1 percent to Texas, but that is just the fund's fourth-largest state allocation.

Still, fundamentals are vital when assessing municipal bonds and the corresponding ETFs.

“A clear path to uncertainty is never what investors in the municipal market desire, but I suggest that if these first 10 days of October have been less than desirable, it should be considered a period of healthy adjustment. I believe new attractive entry points into the municipal asset class are a positive for investors,” said VanEck portfolio manager Jim Colby in a recent note.

VanEck Additions

Last month, VanEck added to its already robust suite of muni ETFs with the launches of the VanEck Vectors AMT-Free 12-17 Year Municipal Index ETF (BATS: ITML) and the VanEck Vectors AMT-Free 6-8 Year Municipal Index ETF (BATS: ITMS).

ITML follows the Bloomberg Barclays AMT-Free 12–17 Year Intermediate Continuous Municipal Index (BVELTR), “which is intended to track the overall performance of the U.S. dollar denominated intermediate term tax-exempt bond market with final maturities from 12–17 years,” according to VanEck.

The VanEck Vectors AMT-Free 6–8 Year Municipal Index ETF tracks the Bloomberg Barclays AMT-Free 6–8 Year Intermediate Continuous Municipal Index (BVE6TR), “which is intended to track the overall performance of the U.S. dollar denominated intermediate term tax-exempt bond market with final maturities from 6–8 years,” according to VanEck.

“Taxable-equivalent yields remain attractive. Ratios of municipal high yield to corporate high yield as well as municipals to U.S. Treasuries remain well above their long-term averages. These factors continue to be favorable for municipals. Any near term adjustments may strengthen these measures,” added Colby.

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