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Munis: Key Takeaways

I like I. G. munis relative to corporate bonds due to the continuing supply / demand imbalance. While new issue supply has increased it is partially offset by the mid-year coupon cash flows. Liquidity risk is always present in the muni bond market.

Muni ETFs remain viable options for beta exposure: iShares MUB and Vanguard VTEB are two good examples

• Low cost beta exposure to the I.G. muni bond market
• Larger municipal bond ETFs (i.e. MUB, VTEB) indicate a comparative value from a Taxable Equivalent Yield perspective relative to the taxable yield of large corporate bond ETFs
• Both are shorter duration than large corporate bond ETFs in general
• Both MUB and VTEB have good liquidity (as represented by ETF share trade volume)

High yield muni bond ETFs still appear attractive: VanEck Vectors HYD and SPDR HYMB are two good examples

• H.Y. munis have performed well given the noise.
• Near term, spreads can widen but I don’t see any time bombs or problematic issues that haven’t been already priced into the market. Longer term, pension challenges persist and surprises can happen so the ease of selling shares of an ETF instead of bond issues is valuable.
• Duration risk is elevated however as H. Y. munis tend to have longer duration than their corporate counterparts.
• The Invesco Taxable Municipal Bond ETF (BAB) has outperformed vs corporate bond ETFs and the supply / demand imbalance plays a role. However, this ETF is significantly less liquid than its counterparts.

I.G. Municipal Bond ETFs v. I. G. Corporate Bond ETFs

Data as of 8/6/2018

Sources: VanEck www.vaneck.com, iShares by BlackRock www.ishares.com, and The Vanguard Group www.vanguard.com. Table is provided for illustrative purposes only. Past performance is not a guarantee of future results. TEY = Taxable Equivalent Yield calculated at an assumed 37% tax rate.

H.Y. Municipal Bond ETFs v. H.Y. Corporate Bond ETFs

Data as of 8/6/2018

Sources: VanEck www.vaneck.com, iShares by BlackRock www.ishares.com, and SPDRs www.us.spdrs.com. Table is provided for illustrative purposes only. Past performance is not a guarantee of future results. TEY = Taxable Equivalent Yield calculated at an assumed 37% tax rate.

Taxable Municipal Bond ETF v. I. G. Corporate Bond ETFs

Data as of 8/6/2018

Sources: Invesco www.invesco.com, iShares by BlackRock www.ishares.com, and The Vanguard Group www.vanguard.com. Table is provided for illustrative purposes only. Past performance is not a guarantee of future results.

Notes:

• Taxable Equivalent Yield = Tax Exempt Yield / (1 – Federal Tax Rate)
• 2018 tax brackets, however not all tax brackets are represented herein

Analyst Disclosure:

• JR Rieger and or the Rieger Report LLC has not received compensation either directly or indirectly from the sponsor(s) of the ETF(s) included in this report.
• At the time of this writing, JR Rieger does not own the ETF(s) cited in this report.
• Between July 1st and July 13th 2018, JR Rieger purchased insured municipal bonds and AA and higher rated municipal bonds in the 8 – 14 year maturity range.

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