Van Eck Global expanded its line of exchange-traded funds with the debut Tuesday of the Market Vectors Short High Yield Municipal Index ETF, its seventh municipal bond ETF and latest tool for cutting duration and increasing yield potential in a rising interest rate environment.
The new fund is comprised of a custom index of diverse tax-exempt securities in the one- to 10-year maturity range, 75% of which are below investment-grade municipal bonds, the firm said during a conference call early Tuesday morning.
The fund enhances liquidity by maintaining 25% exposure in investment-grade triple-B-rated bonds, portfolio manager Jim Colby said. "It adds to the notion that this will be tradable by market players," he said.
Colby said Puerto Rico paper, comprises just under 12% of the index, including the commonwealth's electric, highways, and public building bonds, among others. Detroit bonds, such as the water and sewer debt, account for 3.1% of the index, he said.
In general, the index will also include high-yield securities from a diverse blend of sectors, including transportation, housing, education, and general obligation, Colby said.
The fund began trading Tuesday, following the call, on the New York Stock Exchange Arca under ticker symbol SHYD, with approximately 40 securities, and is the first Market Vectors ETF to focus on short duration high-yield municipals. It seeks to replicate the price and performance of the Barclays Municipal High Yield Short Duration Index (BMHYTR) and is the 53rd ETF in the Market Vectors' family, according to a press release.
The timing of the launch couldn't be better, Colby and Market Vectors' product manager Mike Cohick said.
Colby pointed to the existing bias among investors using new money or reinvestment proceeds for short paper due to the uncertainty over rising interest rates. He expects the fund to appeal to those investors because it will help them position for rising rates by reducing their duration to half that of the long ETF products, while maintaining attractive yield potential.
"The motto for this fund is respect the curve," Colby explained. "SHYD helps to answer questions of what to do in the uncertainty of rising rates."
The firm is confident that the fund will retain an audience even during occasional price movements that may create "strained liquidity."
Colby said the Barclays index "came through the rigors of the downturns in the market," from the 2009 market crisis and 2010, when banking analyst Meredith Whitney triggered a selloff by predicting widespread muni defaults, to the slumpss last June and in the fourth quarter in reaction to the Federal Reserve's plans to cut back economic stimulus. He said he believes SHYD "will be afforded the same benefits" in terms of performance.
Cohick said investors will gain the best of both worlds because they will get more downside protection in a rising rate environment without sacrificing much yield.
He said history bodes well for the index given the low default rates of high-yield municipal bonds versus their corporate counterparts, as well as wider credit spreads between investment grade and high-yield short duration municipal bonds. The wider spreads, Cohick said, can act as a cushion during rising rates because spreads have more room to tighten.
Van Eck's other municipal ETFs include Market Vectors High-Yield Municipal Index ETF, which trades under the ticker HYD, CEF Municipal Income ETF (XMPT), Intermediate Municipal Index ETF (ITM), Long Municipal Index ETF (MLN), Pre-Refunded Municipal Index ETF (PRB), and Short Municipal Index ETF (SMB).
