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The year 2019 is red-hot for municipal bonds that enjoyed their best start to a year this time since 2006. Muni bond funds, in fact, had their best quarter of inflows since 2009. According to Morningstar data, tax-free muni bonds garnered more than $8.8 billion in net flows in the first quarter, surpassing U.S. equity funds ($6.2 billion) and international equity funds ($1.3 billion).
Actively managed muni funds were more in demand than passively managed funds, including ETFs. Active funds fetched $7.5 billion, more than five and a half times more than passive muni funds, which raked in only $1.3 billion in net flows, according to Morningstar.
In such a backdrop, Vaneck Vectors ETF Trust launched an ETF on the muni bond market, namely VanEck Vectors Municipal Allocation ETF . The fund is formed in a fund-of-funds fashion.
Inside MAAX
The fund is actively-managed and looks to achieve its investment objective by investing in VanEck Vectors ETFs that invest in publicly traded municipal bonds that cover the U.S. dollar denominated investment grade and below investment grade tax-exempt bond market.
As of May 21, 2019, VanEck Vectors High-Yield Municipal Ind (HYD) (39.99%), VanEck Vectors AMT-Free Long Municipal (MLN) (30.0%), VanEck Vectors AMT-Free Intermediate Municipal (ITM) (20%) and VanEck Vectors Short High-Yield Municipal (SHYD) (10.01%) form the fund.
Net expense ratio of the fund is 0.36%. State-wise, California (14.4%), New York (10.8%), Illinois (9.3%), Texas (7.8%) get the top four exposure. Healthcare (17.3%), special tax (11.1%), local (11.1%), transportation (9.6%) and education (8.6%) are the top four sectors of the fund.
How Does It Fit In a Portfolio?
Investors should note that municipal bonds are excellent choices for investors seeking a steady stream of tax-free income. Usually, the interest income from munis is exempt from federal tax and may not even be taxable per state laws, making these especially attractive to investors in the high tax bracket, looking to reduce their tax liability. So, demand for munis goes up in the tax season.
But this year, the segment has held up well even after Tax Day was passed in April. The tax reform (or cuts) put muni bonds under pressure in the initial days of Trump administration. But the evaporation of the State and Local Tax (SALT) made investors flock to muni ETF investing.
There is now limitation on the deductibility of state and local taxes (the SALT deduction) from federal taxes for taxpayers in some states. These states include California, Connecticut, Minnesota, New Jersey, New York, South Carolina and Wisconsin. The newly launched fund has about 33% exposure to some of the mentioned states.
The etf.com article went on to mention that “even with the reduction in the maximum federal individual income tax rate from 39.6% to 37%, the cap on the SALT deduction means the combined state and federal maximum effective income tax rates went up in seven states.”
The space is teeming with products, the big asset gatherers beingiShares National AMT-Free Muni Bond ETF (MUB - Free Report) , Vanguard Tax-Exempt Bond Index ETF (VTEB - Free Report) , SPDR Barclays Short Term Municipal Bond (SHM - Free Report) and SPDR Barclays Capital Municipal Bond ETF (TFI - Free Report) . However, none of this is structured as a fund-of-funds. This nolvelty in MAAX should fetch its share of success.
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Tap Muni Market With an ETF-Of-ETFs Approach
The year 2019 is red-hot for municipal bonds that enjoyed their best start to a year this time since 2006. Muni bond funds, in fact, had their best quarter of inflows since 2009. According to Morningstar data, tax-free muni bonds garnered more than $8.8 billion in net flows in the first quarter, surpassing U.S. equity funds ($6.2 billion) and international equity funds ($1.3 billion).
Actively managed muni funds were more in demand than passively managed funds, including ETFs. Active funds fetched $7.5 billion, more than five and a half times more than passive muni funds, which raked in only $1.3 billion in net flows, according to Morningstar.
In such a backdrop, Vaneck Vectors ETF Trust launched an ETF on the muni bond market, namely VanEck Vectors Municipal Allocation ETF . The fund is formed in a fund-of-funds fashion.
Inside MAAX
The fund is actively-managed and looks to achieve its investment objective by investing in VanEck Vectors ETFs that invest in publicly traded municipal bonds that cover the U.S. dollar denominated investment grade and below investment grade tax-exempt bond market.
As of May 21, 2019, VanEck Vectors High-Yield Municipal Ind (HYD) (39.99%), VanEck Vectors AMT-Free Long Municipal (MLN) (30.0%), VanEck Vectors AMT-Free Intermediate Municipal (ITM) (20%) and VanEck Vectors Short High-Yield Municipal (SHYD) (10.01%) form the fund.
Net expense ratio of the fund is 0.36%. State-wise, California (14.4%), New York (10.8%), Illinois (9.3%), Texas (7.8%) get the top four exposure. Healthcare (17.3%), special tax (11.1%), local (11.1%), transportation (9.6%) and education (8.6%) are the top four sectors of the fund.
How Does It Fit In a Portfolio?
Investors should note that municipal bonds are excellent choices for investors seeking a steady stream of tax-free income. Usually, the interest income from munis is exempt from federal tax and may not even be taxable per state laws, making these especially attractive to investors in the high tax bracket, looking to reduce their tax liability. So, demand for munis goes up in the tax season.
But this year, the segment has held up well even after Tax Day was passed in April. The tax reform (or cuts) put muni bonds under pressure in the initial days of Trump administration. But the evaporation of the State and Local Tax (SALT) made investors flock to muni ETF investing.
There is now limitation on the deductibility of state and local taxes (the SALT deduction) from federal taxes for taxpayers in some states. These states include California, Connecticut, Minnesota, New Jersey, New York, South Carolina and Wisconsin. The newly launched fund has about 33% exposure to some of the mentioned states.
The etf.com article went on to mention that “even with the reduction in the maximum federal individual income tax rate from 39.6% to 37%, the cap on the SALT deduction means the combined state and federal maximum effective income tax rates went up in seven states.”
Plus, a dovish Fed and limited supplies turned the wind in favor of muni investing (read: SALT Making Muni Bond ETF Investing Sweeter).
Competition
The space is teeming with products, the big asset gatherers beingiShares National AMT-Free Muni Bond ETF (MUB - Free Report) , Vanguard Tax-Exempt Bond Index ETF (VTEB - Free Report) , SPDR Barclays Short Term Municipal Bond (SHM - Free Report) and SPDR Barclays Capital Municipal Bond ETF (TFI - Free Report) . However, none of this is structured as a fund-of-funds. This nolvelty in MAAX should fetch its share of success.
Want key ETF info delivered straight to your inbox?
Zacks’ free Fund Newsletter will brief you on top news and analysis, as well as top-performing ETFs, each week. Get it free >>