Top-Performing Muni Bond ETFs

February 27, 2014

As rates head higher, muni bonds look more and more attractive.

Municipal bond ETFs are gaining ground this year after taking a beating in 2013 in the wake of the Federal Reserve’s first suggestion of tapering last spring. Interestingly, the asset class’s strong performance seems linked to growing investor confidence that rates are likely to rise slowly, and has come despite credit woes in Puerto Rico—the ninth-largest municipal bond issuer.

Puerto Rico had its debt downgraded to junk status earlier this year, fueling concerns about a potential default. But so far it seems that despite Puerto Rico’s challenges to raise capital, investors in general are increasingly “comfortable” with the prevailing outlook for a slow rise in interest rates ahead, according to Market Vectors’ senior muni strategist Jim Colby.

“Confidence, I believe, can be described as a cumulative state of mind,” Colby said in a recent blog. “I think investors are being reminded of some of the positive elements of the municipal asset class, including low historical default rates and yields currently competitive with those of many other fixed-income investments, particularly on a taxable equivalent basis.”

The broad Barclays Municipal Bond Index is up roughly 2.5 percent so far this year, and there are a handful of ETFs delivering far stronger performances. Below we list the top four best-performing muni bond ETFs year-to-date in ascending order.

4. The Market Vectors Long Municipal ETF (MLN | C-94) is up 5.83 percent year-to-date.

MLN tracks a market-weighted index of federal tax-exempt municipal bonds issued within the last five years with nominal maturities of at least 17 years. The fund has nearly $74 million in assets and has an annual expense ratio of 0.24 percent, or $24 for each $10,000 invested.

The portfolio has a duration of nearly 13 years, and weighted average maturity for all securities of 23 years, for a yield-to-maturity of 5 percent. MLN is currently delivering a 30-day SEC yield of 4.28 percent.

The bulk of the portfolio is tied to revenue bonds—87 percent of the mix, to be precise—followed by an 11.5 percent allocation to general obligation debt.

New York leads the portfolio’s state allocation, with 17 percent of the overall mix, followed by California, at 8.2 percent. Puerto Rico bonds represent 4.74 percent of MLN, according to Market Vectors data.

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