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Muni Bonds on Track for Best Month Since 2009: ETF Winners

Sanghamitra Saha

Overruling coronavirus-related economic worries, municipal bonds are on their way to log their biggest monthly gain since 2009.  The Bloomberg Barclays Municipal Bond Index Total Return Index Value Unhedged USD has returned 2.8% so far in May.

The latest rally erased the huge loss that was incurred in March and is pushing yields back to the lowest in more than 60 years, per Bloomberg. The $3.9-trillion-muni-market has truly found a reason to cheer as states and cities "can borrow virtually for free".

The Fed’s historic $500 billion intervention to help the muni market amid the coronavirus outbreak probably prompted the rally in May. Investors should note that the Fed has also announced the purchases of investment-grade corporate bond ETFs and some high-yield bonds. Since muni bonds offer better protection than corporate bonds, the Fed’s announcement went in favor of the related bonds and ETFs.

On the other hand, munis are yielding better than treasury bonds. Yield of the 10-year investment-grade AAA-rated muni bond was 1.15% on May 28, 2020 versus 0.70% offered by the 10-year treasury bonds. Also, the reopening of the economies and rising hopes of a coronavirus vaccine have also shored up investors’ confidence this month.

Is There Any Risk?

Since entities like airports, schools and colleges were closed during the lockdown, munis will be severely hurt. Lower levels of tax collections would be a cause of concern. Still, bonds backed by states and cities have the lowest default risks, “since governments have the ability to raise taxes and bond payments make up a relatively small share of their budgets,” per the article published on Bloomberg.

No state has defaulted since the Great Depression. “Since 1970, only about $72 billion of the municipal bonds rated by Moody’s Investors Service defaulted, with about $66.5 billion of that from the bankrupted governments of Detroit, Jefferson County, Alabama, and Puerto Rico, according to a December report from investment firm VanEck,” as quoted on Bloomberg.

Against this backdrop, below we highlight a few muni bond ETFs that gained the most past month (see all Municipal Bond ETFs here).

VanEck Vectors AMT-Free Intermediate Municipal Index ETF (ITM) – Up 6.5%

The underlying Bloomberg Barclays AMT-Free Intermediate Continuous Municipal Index comprises publicly traded municipal bonds that cover the U.S. dollar denominated intermediate-term, tax-exempt bond market. The fund charges 24 bps in fees.

VanEck Vectors AMT-Free Long Municipal Index ETF (MLN) – Up 6.3%

The underlying Bloomberg Barclays AMT-Free Long Continuous Municipal Index is intended to track the overall performance of the U.S. dollar denominated long-term, tax-exempt bond market. The fund charges 24 bps in fees.

VanEck Vectors Short High-Yield Municipal Index ETF (SHYD) – Up 5.6%

The underlying Bloomberg Barclays Municipal High Yield Short Duration Index intends to track the overall performance of the U.S. dollar denominated high yield short-term, tax-exempt bond. The fund charges 35 bps in fees.

Invesco National AMT-Free Municipal Bond ETF (PZA) – Up 4.4%

The underlying ICE BofAML National Long-Term Core Plus Municipal Securities Index comprises U.S. dollar-denominated, investment grade, tax-exempt debt publicly issued by states and territories, or their political subdivisions, in the domestic market with a term of at least 15 years remaining to final maturity. The fund charges 28 bps in fees.

SPDR Barclays Capital Municipal Bond ETF (TFI) – Up 4.3%

The underlying Bloomberg Barclays Municipal Managed Money 1-25 Years Index seeks to track the U.S. long term, tax-exempt bond market, including state and local general obligation bonds, revenue bonds, pre-refunded bonds and insured bonds. The fund charges 23 bps in fees.

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SPDR Nuveen Bloomberg Barclays Municipal Bond ETF (TFI): ETF Research Reports
 
VanEck Vectors AMTFree Long Municipal Index ETF (MLN): ETF Research Reports
 
VanEck Vectors AMTFree Intermediate Municipal Index ETF (ITM): ETF Research Reports
 
Invesco National AMTFree Municipal Bond ETF (PZA): ETF Research Reports
 
VanEck Vectors Short HighYield Municipal Index ETF (SHYD): ETF Research Reports
 
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