2023-12-14 19:58:01 ET
Summary
- MUB is the largest municipal bond ETF but has a low dividend yield of 2.6%.
- T-bills and investment-grade bonds may offer higher after-tax yields than MUB for most investors.
- High-yield municipal bond ETFs like HYEM offer much more compelling after-tax yields as well.
- An overview of MUB follows.
The iShares National Muni Bond ETF ( MUB ) is the largest municipal bond ETF in the market. Although the fund offers investors diversified exposure to high-quality, tax-exempt municipal bonds, its 2.6% dividend yield is incredibly low, even after accounting for any potential tax benefits. For most investors, t-bills and investment-grade bonds should offer higher after-tax yields than MUB. For investors in the higher tax brackets, only high-yield municipal bond ETFs, including the SPDR Nuveen Bloomberg High Yield Municipal Bond ETF (NYSEARCA: HYMB ), offer compelling dividend yields. As such, I would not be investing in MUB at the present time.
MUB- Basics
- Investment Manager: BlackRock
- Underlying Index: ICE AMT-Free US National Municipal Index
- Expense Ratio: 0.07%
- Dividend Yield: 2.62%
- Total Returns CAGR 10Y: 2.13%
MUB- Overview
Index and Portfolio
MUB is a municipal bond index ETF, tracking the ICE AMT-Free US National Municipal Index . It is a relatively simple index, including all relevant investment-grade, tax-exempt muni bonds in the market. As with most indexes, applicable securities must meet a basic set of inclusion criteria to be included in the index. It is a market-value weighted index, equivalent to a market-cap weighting scheme but for bonds.
MUB itself has an incredibly well-diversified portfolio, with investments in over 5,800 securities from most relevant industries and states.
MUB
MUB
MUB is an incredibly well-diversified municipal bond ETF, but it does not provide investors with exposure to other fixed-income sub-asset classes, including high-yield corp. bonds and senior loans.
Credit Risk
MUB is an investment-grade municipal bond ETF, focusing on securities with very low credit risk, with an average credit rating of AA.
MUB
Municipal bonds are almost always paid back in full, with incredibly low default rates. AA-rated muni bonds have a 10Y cumulative default rate of only 0.02%, rounding down to 0.0% per year.
As default rates are extremely low, capital losses are extremely infrequent and low, helping sustain share prices long-term. MUB's share price is actually up since inception, somewhat outperforming expectations.
Low default rates also help maintain bond prices and fund share prices during downturns and recessions, leading to outperformance during the same. As an example, the fund's was only down 1.20% during 1Q2020, the onset of the coronavirus pandemic. Capital losses were minimal, much lower than those of equities and high-yield bonds.
Data by YCharts
On the other hand, municipal bonds do not really benefit from a flight-to-quality effect during recessions. Treasuries do, so treasuries tend to see higher prices and outperformance during the same.
Data by YCharts
MUB's high credit quality reduces risk, volatility, and losses during downturns, all important benefits to the fund and its shareholders. Municipal bonds pale in comparison to treasuries in this regard, however.
Interest Rate Risk
MUB invests in bonds of most relevant maturities, with an average time to maturity of 6.6 years, average duration of 6.0 years. Both figures are about average for a bond fund.
Investment-grade corporate bonds, those most comparable to MUB, have significantly higher terms and duration, however. Corporate issuers took advantage of rock-bottom interest rates in 2022 to issue as much long-term debt as they could, leading to much higher maturities and duration. Seems like municipal issuers did not take advantage of low rates to the same extent.
Fund Filings - Table by Author
MUB's duration is slightly below-average, which should lead to slightly above-average returns during downturns and recessions. MUB has significantly outperformed most bonds and bond sub-asset classes since 2022, somewhat outperforming expectations, in magnitude if not direction.
MUB's recent outperformance brings me to my next point.
Dividend Analysis
MUB sports a 2.6% dividend yield, the more traditional dividend metric, and a 3.4% SEC yield, a more forward-looking dividend metric. Both are incredibly low figures on an absolute level, and much lower than average for a bond fund.
Fund Filings - Chart by Author
MUB's comparatively low dividends are at least partly the result of recent outperformance. Most bonds and bond funds have seen much lower share prices, lowering their yields. MUB's share price has been much more resilient, so yields have not risen by as much.
Recent dividend growth seems somewhat below-average as well, although still quite strong on an absolute basis. Compare MUB:
with AGG:
Spreads also look comparatively weak. MUB yielded around 0.5% more than the average bond fund during mid-2010, but yields almost 0.50% less now. Spreads have gone negative since the Fed started to hike rates in early 2022, and haven't been lower in decades.
Data by YCharts
Spreads also look comparatively weak relative to investment-grade corporate bond funds. As with bonds in general, spreads started to go down since the Fed started to hike, and haven't been lower in decades.
Data by YCharts
MUB's dividends do have one key advantage relative to peers: they are exempt from federal taxes. This is a significant, straightforward benefit for investors, and particularly impactful for investors in higher tax brackets, who could significantly reduce their tax bill by investing in MUB over other funds.
Nevertheless, the impact from the above seems small. The fund's 3.5% SEC yield is equivalent to a 5.9% SEC yield for investors in the absolute highest tax bracket . That means those facing a 37% federal income tax rate and the additional 3.8% net investment income tax. For most readers, I imagine taxable equivalent yields are closer to 4.5% - 5.2%, quite a bit lower.
Importantly, the fund's yield still looks low even after accounting for any potential tax benefits.
For investors facing a 37% federal tax rate, the fund has a taxable equivalent yield of 5.6%, barely higher than that of t-bills and investment-grade corporate bonds, both with 5.5%.
For investors in lower tax brackets, these asset classes offer higher after-tax yields than MUB.
For investors in tax-advantaged investment accounts, these benefits more or less do not matter.
MUB offers very marginally higher yields for investors in the absolute highest tax bracket. Although this is definitely a benefit, it is an incredibly small one impacting a small number of investors.
Most investors are likely to achieve stronger after-tax yields by focusing on t-bills and investment-grade corporate bonds, which seem stronger asset classes than MUB.
Investors can also achieve stronger after-tax yields by investing in high-yield municipal bond funds, including HYEM. Said fund sports a 8.4% SEC yield, much more respectable on an absolute basis. For investors facing a 37% federal tax rate, the fund has a taxable equivalent yield of 13.3%, a much more respectable yield, and much higher than that of most bonds and bond sub-asset classes.
HYEM
Conclusion
MUB is the largest municipal bond ETF in the market. Although the fund offers investors diversified exposure to high-quality, tax-exempt municipal bonds, its 2.6% dividend yield is incredibly low, even after accounting for any potential tax benefits. As such, I would not be investing in MUB at the present time.
For further details see:
MUB: Municipal Bond Index ETF, No Compelling Investment Thesis