High-yield municipal bond exchange-traded funds (ETFs) invest in bonds issued by states, municipalities, counties or special purpose districts, such as public schools, to raise money for expenditures. High-yield municipal bond ETFs are tax-exempt, which is favorable to investors in high-income tax brackets. Although this sector of municipal bonds offers high potential yields, it carries a moderate-to-high degree of credit risk. Generally, this type of ETF tracks the performance of an index that focuses on high-yield municipal bonds by using a sampling approach.
SPDR Nuveen S&P High Yield Muni Bd ETF
The SPDR Nuveen S&P High Yield Municipal Bond ETF (NYSEARCA: HYMB) seeks to provide investment results corresponding to the performance of the S&P Municipal Index, HYMB's benchmark index. The benchmark index measures the performance of high-yield municipal bonds issued by various states, local governments, government agencies and territories within the United States. Since HYMB includes municipal bonds, it is exempt from federal income tax. However, HYMB may be subject to state and local income taxes. HYMB charges an expense ratio of 0.45%, while the average expense ratio of its competitors is 0.35%.
HYMB is heavily weighted toward below investment-grade municipal bonds with 10 or more years to maturity. As of Aug. 20, 2015, HYMB has a taxable equivalent yield of 8.05%, a current yield of 5.15% and a modified adjusted duration of 8.44 years. Based on these statistics, the fund is best-suited for fixed-income investors with investment horizons greater than 10 years who have high-risk tolerances seeking exposure to the high-yield municipal bond market while generating high potential federal tax-exempt yields.
Market Vectors High-Yield Municipal Bond
The Market Vectors High-Yield Municipal Index ETF (NYSEARCA: HYD) seeks to replicate and provide investment results corresponding to the Barclays Municipal Custom High Yield Composite Index, its benchmark index. HYD's benchmark index is designed to track the performance of U.S. dollar-denominated, long-term, high-yield, tax-exempt bonds. HYD is the only competitor to HYMB and has 1,076 holdings, total net assets of $1.5 billion and an expense ratio of 0.35%. Although HYD's primary focus is on high-yield municipal bonds, which generally have below investment-grade credit ratings, HYD allocates 32.10% to investment-grade bonds.
HYD has an average yield to maturity of 5.59%, an average coupon of 5.42%, a taxable equivalent 30-day SEC yield, at the federal tax rate of 39.6%, of 7.81% and an effective duration of 9.92 years. Due to its high effective duration, HYD carries a moderate-to-high degree of interest rate risk. If yields increase by 100 basis points, HYD's portfolio theoretically decreases by 9.92%. Therefore, HYD is best-suited for fixed-income investors with high-risk tolerances and long-term investment horizons who seek exposure to a diversified portfolio of high-yield municipal bonds and want to generate monthly income.
Market Vectors Short Hi-Yld Muni ETF
The Market Vectors Short High-Yield Municipal Index ETF (NYSEARCA: SHYD) seeks to provide investment results, with a high degree of correlation, corresponding to the Barclays Municipal High Yield Short Duration. The index tracks the overall performance of high-yield, short-term, tax-exempt U.S. dollar-denominated municipal bonds. SHYD was issued on Jan. 13, 2014, and therefore, its lack of liquidity, wide bid-ask spreads and the absence of historical modern portfolio theory (MPT) statistics make it difficult for investors to determine if it fits their risk profile.
Although SHYD focuses on high-yield municipal bonds like its sister fund HYD, but with shorter durations, it allocates 43.63% to investment-grade, high-yield municipal bonds as of July 31, 2015. Since SHYD focuses on short-term municipal bonds, it has a lower effective duration than its sister fund, HYD, and its competitor, HYMB. This suggests SHYD has a lower degree of interest rate risk than its counterparts, HYD and HYMB. SHYD's effective duration of 4.21 years indicates it theoretically loses 4.21% if interest rates rise by 1%.
All in all, SHYD is best-suited for investors seeking exposure to the short-term, high-yield municipal bond market while generating high potential yields with a low degree of interest-rate sensitivity. In addition, due to its federal tax exemption, SHYD is beneficial for potential investors who are in a higher tax bracket.