TFI - MUB: A Potential Market Haven

2023-10-13 16:48:29 ET

Summary

• iShares National Muni Bond ETF is an interesting fund for investors to consider positioning into government debt, particularly muni bonds.
• The MUB ETF provides broad access to a wide range of municipal bonds, offering diversification across various states.
• MUB's investment-grade credit ratings and stability make it a resilient contender in the face of a broader credit event.

I really do believe we experienced a sovereign credit event a few weeks ago in Treasuries that then filters next into corporate credit. What is an investor or trader to do if that's the case? It may still be to position into government debt, and in particular muni bonds, which may have seen their own near-term bottom.

The iShares National Muni Bond ETF ( MUB ) is an interesting fund for that here. The exchange-traded fund, or ETF, seeks to track the investment results of an index composed of investment-grade U.S. municipal bonds. Launched in 2007, MUB offers investors a low-risk, low-volatility source of income, exempt from federal income taxes.

MUB provides broad access to a wide range of municipal bonds in a cost-efficient, scalable manner. The ETF holds a whopping 5,701 US municipal bonds, offering expansive exposure across various states. This is a very well diversified product with minimal individual security exposure.

The state-specific index shows that MUB's holdings are primarily in New York and California, closely mirroring the size of these state-level economies. However, it's worth noting that the portfolio's diversification extends to other states, offering investors a balanced exposure to various local economies.

Noteworthy Features of MUB

One of the significant features of MUB is its effective duration of 6.5 years. This metric reflects the ETF's sensitivity to changes in interest rates. A higher effective duration implies a greater potential for price fluctuations in response to changing interest rates.

Another notable aspect is MUB's 30-Day SEC Yield, which stands at 3.9%. This figure provides an estimate of the fund's income (interest and dividends) over a 30-day period. It's computed by dividing the net investment income per share earned during the period by the maximum public offering price per share on the last day of the period.

The tax-equivalent yield also makes MUB a competitive choice in the bond ETF space. It's done well relative to some of its other muni peers like the VanEck Intermediate Muni ETF ( ITM ) and the SPDR Nuveen Bloomberg Muni Bond ETF ( TFI ).

The Value of MUB in a Broader Credit Event

Given MUB's investment-grade credit ratings and broad exposure to municipal bonds, it stands as a resilient contender in the face of a broader credit event in corporate debt. If such an event were to occur, the stability and low default risk associated with municipal bonds could potentially offer a buffer against market volatility. When we look at a total return chart, we can see it's back to 2019 levels. That's not a bad thing if you believe ultimately in buying at cheaper prices (which is what every investor ideally should do).

I like iShares National Muni Bond ETF here. It's a compelling proposition for investors seeking a diversified, low-risk fixed income investment. Its tax-advantaged status, broad exposure to municipal bonds, and competitive yield make it an attractive option for those looking to optimize their portfolio. It won't have the convexity of long-duration Treasuries ( TLT ) in a credit dislocation, but can still serve as a nice ballast in an overall portfolio.

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