VanEck expands suite of municipal bond ETFs

Oct 7th, 2016 | By | Category: Fixed Income

Exchange-traded fund provider VanEck has unveiled two new funds providing investors with targeted exposure to intermediate-term municipal bonds. The launch of the VanEck Vectors AMT-Free 12-17 Year Intermediate Municipal Index ETF (Bats: ITML) and the VanEck Vectors AMT-Free 6-8 Year Intermediate Municipal Index ETF (Bats: ITMS) bring the number of ETFs in VanEck’s municipal bond suite to nine.


James Colby, Portfolio Manager with VanEck

Municipal bonds are debt securities issued by a state, municipality or county to finance its capital expenditures. They are exempt from federal taxes and from most state and local taxes. Municipal bonds fall within two general categories: general obligation bonds (those that are secured by the authority’s pledge to use tax revenues to repay bond holders) and revenue bonds (those that rely on income generated from a specific project into which the funds were allocated to repay bond holders).

Due to the inherent link between taxes raised and ability to pay, the state of the broad US economy generally plays an important role in investors’ analysis of general obligation bonds. The continuing recovery of the US economy has provided a boost to ETFs covering this sector lately.

Investors should be wary of signs that the Federal Reserve will further increase interest rates to fight inflation as, similar to most fixed income securities, the value of municipal bonds moves inversely to rates.

Revenue bonds generally require closer examination of the proposed project for which the funds will be dedicated.

These ETFs allow investors to further define the exposure offered via the existing $1.6bn VanEck Vectors AMT-Free Intermediate Municipal Index ETF (NYSE: ITM). ITM currently invests in municipal bonds with remaining maturities between 5-20 years although the most common maturity brackets are 10-15 years (approximately 50% allocation) and 7-10 years (approximately 35%). It has a total expense ratio (TER) of 0.24%.

James Colby, Portfolio Manager with VanEck, commented: “Historically, the intermediate portion of the curve has been a “sweet spot” in munis, having offered one of the greatest potential to gain incremental returns as investments move from longer maturities to shorter maturities, also known as rolling down the yield curve. ITM, and now ITML and ITMS, provide targeted ways for investors to potentially capture that opportunity in highly refined ways.”

ITML tracks the Bloomberg Barclays AMT-Free 12-17 Year Intermediate Continuous Municipal Index, while ITMS tracks the Bloomberg Barclays AMT-Free 6-8 Year Intermediate Continuous Municipal Index. Each of the new funds also has a TER of 0.24%.

As of 6 October 2016, ITML’s index has a yield to maturity of 3.2% and an effective duration of 7.5 years. State general bonds (18.9%), local general bonds (16.3%), transportation bonds (14.9%), special tax bonds (11.3%) and water utilities bonds (9.2%) are the main sector holdings, while AA-rated (58.1%), A-rated (22.8%) and AAA-rated bonds (16.4%) are the main credit quality brackets.

ITMS’s index has a yield to maturity of 1.7% and an effective duration of 5.7 years. State general bonds (25.7%), local general bonds (18.2%), transportation bonds (12.5%), special tax bonds (10.8%) and water utilities bonds (9.1%) are the main sector holdings, while AA-rated (61.5%), AAA-rated (19.1%) and A-rated bonds (16.5%) are the main credit quality brackets.

“We have seen tremendous investor interest in our muni bond ETFs over the past several months, ITM in particular which, as of 31 August 2016, had over $1.6bn in assets” added Colby. “While munis continue to be popular with individual investors and their advisors, we believe asset allocators and ETF strategists may find these new ETFs particularly useful for managing client portfolios.”

In addition to ITM, ITML and ITMS, VanEck’s suite of muni bond ETFs also includes:
VanEck Vectors AMT-Free Long Municipal Index ETF (NYSE: MLN)
VanEck Vectors AMT-Free Short Municipal Index ETF (NYSE: SMB)
VanEck Vectors CEF Municipal Income ETF (NYSE: XMPT)
VanEck Vectors HighYield Municipal Index ETF (NYSE: HYD)
VanEck Vectors Short High-Yield Municipal Index ETF (NYSE: SHYD)
VanEck Vectors Pre-Refunded Municipal Index ETF (NYSE: PRB)

Some of the largest ETFs in the US to offer exposure to the municipal bond market include funds from iShares and SPDR ETFs.

The iShares National Muni Bond ETF (NYSE: MUB) has over $7.7bn in assets under management, making it the largest ETF to track the US municipal bond market. The ETF has over 3,000 holdings, thereby offering a diversified investment. State Tax-Backed Bonds (37.7%) make up the largest sector, followed by Utility (15.7%), Transportation (14.7%), and Local Tax-Backed Bonds (11.4%). The fund adopts a barbell portfolio with significant holdings in the ranges of 0-3 years (20.8%), 3-6 years (12.3%), 15-20 years (11.4%), 20-25 years (13.5%) and 25+ years (14.6%). AA-rated bonds make up the largest credit quality with 55.7%, followed by AAA-rated (23.3%) and (A-rated 18.3%) It has a TER of 0.25%.

The SPDR Nuveen Barclays Municipal Bond ETF (NYSE: TFI) invests its $1.8bn in AUM primarily in municipal bonds with maturities of 20-30 years (23.9%), 10-15 years (19.9%), 15-20 years (14.7%) and 5-7 years (11.9%). There are over 880 holdings in the fund with General Obligation Bonds make up the majority of the fund’s holdings with GO State (24.6%) and GO Local (21.3%) holding the largest weights. Water & Sewer (15.2%), Special Tax (11.1%) and Education (10.5%) bonds also play significant roles. The credit quality with the largest weight is AA (77.0%) followed by AAA (23.0%). It has a TER of 0.23%.

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