The combination of interest rates remaining lower for longer and investors demanding more income and yield have been driving forces behind the resurgence of municipal bond exchange-traded funds this year.
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One thing fixed income investors have heard plenty about for over a year now is the impact of low oil prices on the high-yield bond market and the corresponding exchange-traded funds.
Some of the biggest names in the junk bond ETF space are either afflicted by large weights to energy bonds, risky CCC-rated debt or both. Still, investors have been racing back to junk bond ETFs as oil prices are rebounding.
Although there has been some chatter regarding the impact of falling oil prices on municipal bonds, conservative fixed income investors have been embracing municipal bond ETFs, even longer duration funds, as the Federal Reserve has put off raising interest rates.
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Up 3.5 percent year-to-date and home to nearly $1.2 billion in new assets this year, the iShares S&P Natnl AMT - Free Munpl Bd Fd (MUB) underscores the strength in municipal bonds in 2016. Still, investors should look closely to see which states' munis are leading the asset class higher.
What states are leading the pack? The answer includes some of the states that have been performance drags in the past. Municipal bonds issued within Puerto Rico, New Jersey and Illinois are in the top five at this point in 2016. Puerto Rico revenue bonds have held on to their bounce off the bottom despite Puerto Ricos default earlier this month. As for bonds from other states, the demand for bonds with any incremental yield over other bonds has helped push up the prices of bonds issued within states such as New Jersey and Illinois, said S&P Dow Jones Indices Head of Fixed Income J.R. Rieger in a recent note.
MUB, which tracks the S&P National AMT-Free Municipal Bond Index, allocates nearly seven percent of its combined weight, to New Jersey and Illinois munis. California and New York combine for 43.2 percent of the ETF's weight.
Bonds from Virgin Islands are suffering in the shadow of Puerto Ricos struggles. Municipal bonds from oil states such as New Mexico and North Dakota remain in positive return territory but are beginning to show the impact of the economic drag low priced oil has created, added Rieger.
Those states have scant representation in MUB. The ETF yields 1.14 percent with an effective duration of 4.7 years.
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