After witnessing strong headwinds in 2013, fixed income instruments seem to have found favor with investors going into 2014, thanks to weak economic data and a mixed earnings season. Market participants who called for rebalancing portfolios are quietly hitting the pause button, waiting to see more solid numbers before making the next move on riskier assets.
The municipal bond segment has attracted much negative press in recent times, especially after reports of deepening public pension crises across the US, the financial turmoil in Puerto Rico and the Detroit bankruptcy. Yet there are investors who believe there are many more areas of opportunity in the broader municipal market than the trouble spots.
Apart from the fiscal worries, the concern over the Fed’s pace of tapering and a rising interest rate environment makes short duration securities more attractive for investors. The space for short-term muni bond ETFs, however, remains pretty small. Market Vectors, the ETF issuing arm of Van Eck Global, has launched the Short High-Yield Municipal Index ETF (SHYD) to give investors exposure in the short end of the muni bonds curve.
SHYD tracks the price and yield performance of The Barclays Municipal High Yield Short Duration Index and can be perceived as the short-duration equivalent of the more than $800 million Market Vectors High Yield Municipal Index ETF (HYD). Although it’s the first product in the high-yield muni space, the new fund, however, can’t be classified as a pure ultra-low duration product as it features issues with maturities ranging from one to 10 years.
Bonds rated BBB (investment grade) constitutes 25 percent of the portfolio in order to boost liquidity while the remaining 75 percent are junk bonds (below investment grade).
That ratio, along with a market value weighting methodology, delivers a high yield as evident from the index. Also, the fund only includes municipal bonds paying fixed coupons and doesn’t use derivatives or taxable bonds.
SHYD has a yield-to-worst of 5.35 percent and the average duration to worst is 3.59 years. Sector wise, industrial revenue/pollution control gets the maximum exposure at 33 percent, followed by health care (18.5 percent) and special tax (16.6 percent).
SHYD has an annual expense ratio of 0.35 percent.
Disclosure: No holdings
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