Market Vectors has launched the latest addition to its family of municipal income-focused exchange-traded funds, the Market Vectors Short High-Yield Municipal Index ETF (SHYD).
This fund is the first ETF to track an index that provides targeted exposure solely to the shorter end of the municipal yield curve.
SHYD seeks to replicate as closely as possible, before fees and expenses, the price and yield performance of the Barclays Municipal High Yield Short Duration Index (BMHYTR), a market size weighted index composed of publicly traded municipal bonds that cover the US dollar-denominated high yield short-term tax exempt bond market. To be included in the index, a bond must have a nominal maturity of one to 10 years.
Taxable municipal bonds, bonds with floating rates and derivatives are excluded from the index. The index rules maintain a 75 per cent weight in below investment grade municipal bonds and as an added liquidity feature a 25 per cent weight in Baa/BBB- rated investment grade municipal bonds.
"The shorter duration focus of SHYD may lessen the impact of a rising rate environment making this a potentially useful tool for investors and advisors who are looking for ways to position their fixed income portfolios in today's uncertain rate climate," says Michael Cohick, product manager with Market Vectors. "High yield municipal bonds continue to have historically low default rates versus their corporate counterparts and deliver income that is generally exempt from income taxes. With all this in mind, we're very pleased to be adding SHYD to our fund family."
Cohick says credit spreads between investment grade and high yield short duration municipal bonds tend to be wider than the spreads found among longer maturity municipal bonds. For example, the spread between investment grade and high-yield municipal bonds with two-to four-year maturities was 4.40 per cent as of 10 January 2014, according to Barclay's index data on Bloomberg. By way of comparison, the spread figure was 3.27 per cent for eight-to 12-year municipal bonds and 2.45 per cent for 22+ year municipal bonds. A wider spread in shorter maturities, as is presently the case, may act as a cushion during times of rising interest rates, given that spreads have more room to tighten, potentially lessening the impact of declining bond prices.
SHYD joins the Market Vectors fund family that includes Market Vectors High-Yield Municipal Index ETF (HYD), which has gathered approximately USD794m in assets as of 31 December 2013. HYD tracks an underlying index that takes an "all-maturity" approach to the high yield municipal bond space.
"HYD's approach, which includes bonds with maturities ranging from 1 to 30 years, can make it more interest rate sensitive than SHYD with its shorter duration focus," says Cohick. "However, for a steady or falling rate environment, HYD may continue to offer a means of maximising yield potential from across the broad high yield municipal yield curve."