The October jobs report, delivered earlier Friday, was enough to spark a surge in Treasury yields. Ten-year Treasury yields are trading higher by four percent at this writing, bringing the one-month climb in yields on the benchmark U.S. government bond to 13.3 percent.
Although fixed income ETFs have been among this year's most prolific asset gatherers as invesors have recently piled into both investment-grade and high-yield corporate bond funds, longer duration ETFs will be vulnerable as yields in anticipation of the Federal Reserve raising interest rates next month. Municipal bond funds, previously favored destinations for income investors, are not exceptions to that rule. However, that does not mean the asset class should be abandoned outright.
Municipal bond mutual funds gathered $2.8 billion in the four-week period ended October 28, according to Investment Company Institute, even as muni bond ETFs added $593 million of inflows in October. However, at a recent S&P Dow Jones Indices Municipal and Global Bond Forum, various panelists highlighted the relative benefits of municipal bond ETFs, said S&P Capital IQ in a new research note.
The $5.5 billion iShares National AMT-Free Muni Bond ETF (NYSE:MUB) has added $251.7 million in new assets during the fourth quarter while the a high-yield rival, the $407.3 million SPDR Nuveen S&P High Yield Municipal Bond ETF (NYSE:HYMB), has seen fourth-quarter inflows of over $51 million.
MUB allocates a combined 78 percent of its weight to bonds rated either AAA or AA and the ETF's effective duration is 4.7 years, according to issuer data. With a yield-to-worst of 5.25 percent, HYMB allocates two-thirds of its weight to municipal bonds rated below Baa or not rated at all.
Data suggest investors are better off with passive municipal bond funds, such as ETFs, than actively managed equivalents. http://www.benzinga.com/news/15/09/5829832/active-management-mediocrity-continues
J.R. Rieger, Managing Director of Fixed Income Indices for S&P Dow Jones Indices, highlighted that just one-third of all active national municipal bond funds outperformed the S&P Municipal Bond index in the three-year period ended June 2015. Further, just 16% of those funds that were in the top-quartile of their muni bond peer group in the 12-month period ended March 2013 retained that ranking in the subsequent period, said S&P Capital IQ.
Investors looking for regionally-focused muni bond ETF can consider the $188 million iShares New York AMT-Free Muni Bond ETF (NYSE:IYF). IYF has a 30-day SEC yield of about 1.6 percent and a duration of 4.5 years. Over 81.5 percent of its combined weight goes to bonds rated AAA or AA.
IYF tracks a broad, market value-weighted S&P index that seeks to measure the performance of bonds issued within New York. All the bonds inside NYF have investment-grade credit ratings. However, if you live in New York, the ETF's 1.7% 30-day SEC might look low relative to the Lipper New York Municipal Debt fund mutual fund peer group's 2.1%, said S&P Capital IQ.
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