HYD VanEck High Yield Muni ETF

The year 2013 was pretty rough for municipal bonds as investors embraced equities over fixed income. Beyond low returns, the fiscal strength of many municipalities remains pretty weak, as bankruptcies in small California towns and the major city of Detroit had a dampening effect on the returns—and outlook-- of the municipal bond market.

Beyond fiscal worries, there was also the concern of the taper, which pushed investors into shorter duration securities. While there are a few short term muni bond ETFs currently on the market, the space is still pretty small compared to other corners of the space.  And now, thanks to Market Vectors, the muni bond space now has another product that focuses on the short end of the curve (Read: Three Municipal Bond ETFs for 2014).

This new fund trades under the name of Short High-Yield Municipal Index ETF with a symbol of SHYD. The fund seeks to track the price and yield performance of The Barclays Municipal High Yield Short Duration Index before fees and expenses. For investors looking for a new option in the high yield corner of the muni market, we have highlighted some of key details of the fund below:

SHYD in Focus

This fund is the first of its kind in the short duration high yield muni space. The index holds the highest yielding U.S. dollar denominated municipal bonds that have a tax exempt status.

Due to the fund’s focus on the short end of the municipal bond curve, it only holds bonds having maturities within 1 to 10 years from now (Read: AdvisorShares Launches New Low Duration Bond ETF).

The index uses a market value weighting methodology and has a 75% exposure to junk bonds (below investment grade bonds) in order to deliver a high yield. However, to boost its liquidity, the fund also allocates 25% of the fund value to investment grade municipal bonds.

Moreover, the fund includes only municipal bonds paying fixed interest rates and doesn’t build any positions in taxable bonds or derivatives.

Currently the fund holds 43 municipal bonds in its portfolio and is well spread among individual bonds. Tobacco Settlement Financing Corp. (4.67%), Piedmont Municipal Power Agency (4.28%) and Texas Municipal Gas Acquisition (3.99%) are the top three holdings. The fund charges 35 basis points annually, which is on par with other muni 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,” said Michael Cohick, Product Manager with Market Vectors in a press release.

How does it fit in a portfolio?

Even though the Fed has promised to keep interest rates near zero levels in the short term providing some safety to municipal bonds, a rising rate scenario would still provide protection to this fund.

Thus, this fund could come in handy for investors looking to reduce interest rate risk in the municipal bond space. This is due to the fact that the fund focuses only on short term municipal bonds (See all Municipal Bond ETFs here).

Most importantly, a gradually improving U.S. economy will provide relief to investors as the credit quality of the municipal bonds could improve, thereby reducing default rates.

Investors should keep in mind that as municipal bonds provide tax free income, the yields from these bonds are lower than other high yield corporate bonds. However, they are relatively safer than corporate bonds.

ETF Competition

Though there are two other funds in the high yield municipal bond space – Market Vectors High Yield Municipal Index ETF (HYD) and SPDR Nuveen S&P High Yield Municipal Bond ETF (HYMB) –SHYD is the first in the high yield municipal bond space focusing on short duration bonds (Read: HYLD: The Best Choice Among High Yield Bond ETFs?).

As such this fund has a clear road ahead and might garner more assets in the forthcoming months, especially if investor interest in fixed income is rekindled later this year.

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MKT VEC-HY MUNI (HYD): ETF Research Reports
 
SPDR-NU SP HYMB (HYMB): ETF Research Reports
 
MKT VEC-SH HY M (SHYD): ETF Research Reports
 
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