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Market Vectors, the exchange-traded funds brand of Van Eck, has announced the launch of the Market Vectors Short High-Yield Municipal Index ETF (SHYD), an NYSE Arca-listed ETF providing exposure to the shorter end of the municipal yield curve.
The fund is linked to the Barclays Municipal High Yield Short Duration Index, a market capitalization weighted index composed of publicly traded municipal bonds that cover the US dollar-denominated high-yield short-term tax exempt bond market.
To be included in the index, a bond must have a nominal maturity of 1 to 10 years. Taxable municipal bonds, bonds with floating rates, and derivatives are excluded from the index. The index rules maintain a 75 percent weight in below investment grade municipal bonds and as an added liquidity feature a 25 percent weight in Baa/BBB- rated investment grade municipal 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. “High yield municipal bonds continue to have historically low default rates versus their corporate counterparts and deliver income that is generally exempt from income taxes. With all this in mind, we’re very pleased to be adding SHYD to our fund family.”
Cohick noted that credit spreads between investment grade and high yield short duration municipal bonds tend to be wider than the spreads found among longer maturity municipal bonds. For example, the spread between investment grade and high-yield municipal bonds with 2-to 4-year maturities was 4.40 percent as of Jan 10, 2014, according to Barclay’s index data on Bloomberg.
By way of comparison, the spread figure was 3.27 percent for 8-to 12-year municipal bonds and 2.45 percent for 22+ year municipal bonds. A wider spread in shorter maturities, as is presently the case, may act as a cushion during times of rising interest rates, given that spreads have more room to tighten, potentially lessening the impact of declining bond prices.
The new fund joins the Market Vectors fund family that includes the Market Vectors High-Yield Municipal Index ETF (HYD), also listed on the NYSE Arca, which has gathered approximately $794 million in assets as of December 31, 2013. HYD tracks an underlying index that takes an “all-maturity” approach to the high yield municipal bond space.
“HYD’s approach, which includes bonds with maturities ranging from 1 to 30 years, can make it more interest rate sensitive than SHYD with its shorter duration focus,” added Cohick. “However, for a steady or falling rate environment, HYD may continue to offer a means of maximizing yield potential from across the broad high yield municipal yield curve.”
The new fund has a total annual operating expense ratio of 0.35 percent.