Muni ETFs: Low Yield Doesn't Mean Low Return

August 04, 2016

Honorable Mention

Several muni ETFs from outside of the top 12 are worth pointing out: The iShares New York Muni Bond ETF  (NYF), the PIMCO Intermediate Municipal Bond Active ETF (MUNI), the SPDR Nuveen Barclays California Municipal Bond ETF (CXA), the First Trust Managed Municipal ETF (FMB) and the VanEck Vectors AMT-Free Long Municipal Index ETF (MLN) have lower correlations than most with attractive dividend yields.

In addition, the VanEck Vectors CEF Municipal Income ETF (XMPT) has been able to generate higher dividend yields and impressive total returns, but keep in mind that the leveraged closed-end muni bond funds in which XMPT invests have very long durations, so XMPT will show a very high sensitivity to changes in interest rates; hence, the strong recent performance given the current rate environment.

 

Ticker Fund  AUM  3-Mo Return 1-Year Return Dividend Yield Duration Credit Quality YTM Corr to SPY Corr Rank YTD Net Flows thru 7-28-16 
MUB iShares National Muni Bond ETF $7,390.0 1.79% 6.57% 2.33% 5.47 AA- 2.60% -0.55 6 $1,290.2
PZA PowerShares National AMT-Free Municipal Bond Portfolio $1,390.0 2.29% 8.43% 3.31% 6.64 AA- 3.72% -0.41 15 $380.3
HYD VanEck Vectors High-Yield Municipal Index ETF $2,210.0 3.12% 11.52% 4.37% 7.15 B+ 5.13% -0.22 25 $375.0
TFI SPDR Nuveen Barclays Municipal Bond ETF $1,990.0 2.03% 7.89% 1.43% 6.76 AA 2.52% -0.67 1 $332.4
VTEB Vanguard Tax-Exempt Bond Index Fund ETF $401.3 1.84% -- -- 5.47 AA- 2.62% -0.58 2 $250.7
BAB PowerShares Build America Bond Portfolio $990.4 6.21% 14.25% 4.17% 9.64 A+ 4.27% -0.58 3 $246.5
SHM SPDR Nuveen Barclays Short Term Municipal Bond ETF $3,000.0 0.71% 1.98% 0.62% 2.82 AA 1.00% -0.45 10 $239.5
ITM VanEck Vectors AMT-Free Intermediate Municipal Index ETF $1,540.0 1.89% 8.45% 2.19% 6.65 AA- 2.60% -0.58 4 $166.4
CMF iShares California Muni Bond ETF $618.0 1.63% 6.53% 2.29% 5.73 AA- 2.58% -0.57 5 $138.0
SUB iShares Short-Term National Muni Bond ETF $1,060.0 0.42% 1.33% 0.76% 1.91 AA 0.96% -0.28 22 $84.9
HYMB SPDR Nuveen S&P High Yield Municipal Bond ETF $507.0 3.46% 11.49% 4.24% 6.85 B+ 5.13% -0.39 16 $77.1
MLN VanEck Vectors AMT-Free Long Municipal Index ETF $182.3 3.08% 11.14% 3.03% 9.25 A+ 3.72% -0.44 13 $60.0
XMPT VanEck Vectors CEF Municipal Income ETF $112.9 5.03% 22.65% 4.72% -- -- -- -0.22 26 $44.9
FMB First Trust Managed Municipal ETF $78.3 2.46% 8.74% 2.93% 6.28 BBB 3.24% -0.45 11 $34.3
NYF iShares New York Muni Bond ETF $240.4 1.67% 6.52% 2.46% 5.26 AA- 2.70% -0.50 7 $34.1
CXA SPDR Nuveen Barclays California Municipal Bond ETF $149.0 2.19% 8.78% 2.26% 7.22 AA 2.60% -0.47 9 $32.3
MUNI PIMCO Intermediate Municipal Bond Active ETF $256.3 1.60% 6.16% 2.26% 4.69 A 2.12% -0.49 8 $13.7

 

Looking Ahead

It is generally imprudent to try to time interest rates. The best course of action is to understand your specific goals and select the muni ETFs that best fit your goals. Read How to Pick the Right Muni ETF to better understand how to use duration and credit quality when selecting a muni ETF.

When fitting a muni ETF into your portfolio strategy, also consider how well it can be expected to diversify your existing holdings. The more your fixed-income ETF is correlated to your equity risk exposure, the larger your allocation to bonds will need to be to achieve the desired diversification.

Below is a graph of the universe of muni ETFs compared to the benchmark triple-A yield curve, provided courtesy of Municipal Market Analytics.

 

Munis Fig 4

For a larger view, please click on the image above

 

 

Patrick Luby is a municipal bond portfolio strategy specialist and the author of www.IncomeInvestorPerspectives.com. He will be a speaker at the Inside ETFs Inside Fixed Income Conference in Newport Beach, California, Nov. 2-3.

At the time of writing, the author held none of the securities referenced. This is not a recommendation to buy, sell or hold any of the securities or strategies mentioned. The author does not provide investment, tax, legal or accounting advice. Investors should consult with their own advisor and fully understand their own situation when considering changes to their strategy, tactics or individual investments. Information is based on sources believed to be reliable, but its accuracy is not guaranteed. Additional information is available upon request.

 

 

Find your next ETF

Reset All