State Street, the issuer behind the two largest U.S.-listed ETFs, made a new addition to the fixed income portion of its product lineup this week. The recently-launched SPDR Nuveen S&P High Yield Municipal Bond ETF (HYMB) will seek to replicate the performance of the S&P Municipal High Yield Index, a benchmark that consists of bonds issued by U.S. states and territories, local governments or agencies, that are rated below investment grade.
High Yield Muni Bond ETF In Focus
The underlying index includes more than 21,000 individual issues, with the largest issues going to California (15%), New York (11%) and Florida (7.2%). A number of smaller states/territories also find their way into the top 10 such as Puerto Rico, Tennessee and Colorado. In terms of individual holdings, some extremely long-dated issues dominate the top of the list. Two of the underlying index’s biggest allocations go to Tobacco Settlement bonds that mature in mid 2038 and mid 2045 while the rest of the top five doesn’t mature until at least 2030. The modified option-adjusted duration for the index underlying HYMB is 8.7 years.
According to the fund’s fact sheet, the index’s average yield to worst is a robust 7.2%, which translates into a taxable equivalent yield of 11%. That yield is considerably higher than funds focusing on investment grade municipal bond issues. The iShares S&P Municipal Bond Fund (MUB), the largest in the National Munis ETFdb Category with close to $2 billion in AUM, has a 30-Day SEC yield of about 3.5% and an average yield to maturity of 3.8% (the tax-equivalent 30-Day SEC yield comes out to 5.4% assuming an effective rate of 35%). Yields on municipal bonds have climbed higher in recent months as investors have become concerned about a wave of defaults in the historically safe space, and there have even been suggestions that the tax exempt nature of interest payments may be on the chopping block.
Most municipal bonds maintain high credit ratings, as issuers often have the ability to raise taxes to repay obligations. High yield municipal bonds are often issued by not-for-profit entities such as hospitals, nursing homes, or private colleges working with government entities. Some corporate issuers, including airlines or auto companies, may also be able to issue municipal bonds by working together with public authorities. High yield municipal bonds generally maintain a maturity of at least 20 years, and are often callable.
High yield munis have historically exhibited a default rate considerably lower than high yield corporate debt, though the yields offered can be comparable - especially for those investors in high tax brackets.
HYMB vs. HYD
Currently, the field of high yield muni bond funds is pretty sparse. Only one other ETF is currently in the space, the Market Vectors High Yield Municipal Bond Index ETF (HYD). This fund from Van Eck has been around for a little more than two years and has amassed close to $200 million in assets during that timeframe. HYD is linked to an index comprised of a 75% weight in non-investment grade municipal bonds and a 25% weight in Baa/BBB-rated investment grade municipal bonds. That ETF has a 30-day SEC yield of about 6.3%, which translates into 8.4% for those in the 25% tax bracket and 9.7% for those in a higher 35% bracket.
The new fund will mark the 24th bond ETF from State Street, which has already seen great success in the fixed income space. Currently, State Street has four bond funds with more than $1 billion in assets including a high yield bond fund JNK. In terms of other municipal bond products, the Boston-based firm has three, all based on similar Nuveen indexes. It currently has a short-term muni bond fund (SHM), a total market fund (TFI), and an extremely short-term fund that targets the VRDO slice of the market (VRD). Both SHM and TFI have become huge hits with investors, combining to amass more than $2 billion in assets, however, VRD has not been as fortunate as the fund has picked up just $9 million since its debut in the fall of 2009.
HYMB will charge an expense ratio of 0.45%. HYD charges just 0.35%.
Disclosure: No positions at time of writing.
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