Muni Bond ETFs: Got Credit?

ETF Trends

One point which I believe is universally made regarding the municipal bond market is that the overall credit quality (the implied security) of the issues brought to the market not only underpins the attraction of municipals as an asset class, but separates it very distinctly from other fixed-income choices.

Moody’s, S&P and Fitch are the companies whose analyses of the legal, contractual and moral promises made by issuers result in a scorecard grade that may suggest the likelihood of full and timely repayment of their debts. I think it is a good time to revisit some of these important details, lest we lose sight of what brings strength to this market.

First, there are 13 states that garner no less than a triple-A (AAA) rating from one or all of the above agencies. States such as Alaska, Delaware, Georgia, Maryland and North Carolina are part of a subset that have triple-A from all three. *

Second, apart from Puerto Rico and other Territories of the U.S., the lowest-rated states are California (A1, A-, A-) and Illinois (A2, A, A). Neither one has anything less than an A- from at least one of the three agencies. In fact, included in the list of the 10 lowest-rated states are New Jersey (Aa3, AA-, AA-) and Michigan (Aa2, AA-, AA-). [Muni Bond ETFs and the Tax-Free Coupon]

The point? Though this just speaks to state issuers, since the bottom of the investment grade range is BBB-, one should appreciate that the general quality of bonds appears very strong. As shown in the graph below, the average rating among all U.S. states is AA. Thus, in the context of a broadly diversified portfolio, the quality, in my opinion, represents a high likelihood of full repayment.

The next installment will more fully explore this thesis.

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Source: S&P and First Southwest as of January 22, 2013.

James Colby is a portfolio manager and senior municipal strategist at Market Vectors ETFs.

*As of January 22, 2013, the full list of states with triple-A ratings from all three rating agencies includes: Alaska, Delaware, Georgia, Iowa, Maryland, Missouri, North Carolina, Utah and Virginia. The rating scales are as follows, from excellent (high-grade) to poor (including default) for Moody’s, S&P and Fitch: Aaa/AAA/AAA to C/D/D, with intermediate ratings offered at each level between. Anything lower than a Baa/BBB-/BBB- rating is considered a non-investment-grade, high-yield or junk bond.

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