Municipal bond ETFs should be well-positioned to weather an environment of rising interest rates.
As the market braces for the Federal Reserve’s first rate hike in more than six years, muni bond issuance has been at a record high, reaching nearly $220 billion this year. That massive supply spike came as investors opted to stay sidelined and build up cash reserves waiting for the Fed to take a stance.
But now, these bonds, which have mostly been issued to refinance older, higher-coupon bonds, according to data provided by Cumberland Advisors, are attracting renewed interest thanks in part to the attractive yields they are shelling out. A strong performance is also bringing back investor demand.
Assets Flowing In
In October alone, muni ETFs raked in nearly $600 million in new assets. The iShares National AMT-Free Muni Bond ETF (MUB | B-79)—the largest muni ETF in the market, with $5.5 billion in assets—has gathered nearly $1.5 billion in fresh net assets so far this year. In the high-yield space, the Market Vectors High-Yield Municipal ETF (HYD | C-59) has seen net inflows of $200 million. HYD has $1.65 billion in total assets.
And consider this: Vanguard, the second-largest ETF issuer in the U.S. today, had only one ETF launch in 2015, and it was a muni fund—its first. The Vanguard Tax-Exempt Bond Index (VTEB) hasn’t been in the market three months yet, and it has $67 million in assets.
As John Miller, co-head of fixed income at Nuveen Asset Management, recently summarized in a webcast: Returns year-to-date are positive across the curve, and it’s income that’s driving returns. Moreover, munis’ tax exemption has also been “increasingly valuable” to investors, and “the stability and low correlation to other asset classes has been a hallmark of the municipal market so far this year,” he says.
“All those features should be attractive to keep people engaged and keep performance up,” he added, noting that the fourth quarter could be the muni market’s best in 2015.
So far this year, muni ETFs have outperformed long-dated Treasury bonds, all the while delivering nontaxable yields.
Chart courtesy of StockCharts.com
Why Should You Consider?
Here are five reasons you should own munis, according to market insight from Cumberland Advisors: