Another Reason To Like Municipal Bond ETFs

One thing fixed income investors have heard plenty about for over a year now is the impact of low oil prices on the high-yield bond market and the corresponding exchange traded funds.

Some of the biggest names in the junk bond ETF space are either afflicted by large weights to energy bonds, risky CCC-rated debt or both. Still, investors have been racing back to junk bond ETFs as oil prices are rebounding. 

Although there has been some chatter regarding the impact of falling oil prices on municipal bonds, conservative fixed income investors have been embracing municipal bond ETFs, even longer duration funds, as the Federal Reserve has put off raising interest rates. Just look at the iShares National AMT-Free Muni Bond ETF MUB. Already the largest municipal bond ETF with $6.48 billion in assets under management, MUB has added nearly $445 million in new assets this year.

MUB's sturdiness and its inflows can be seen as signs that municipal bonds have been relatively immune to energy-related bond market volatility.

“While some states are major oil producers, the impact of oil’s slide has been fairly limited. Texas, the biggest oil producer, is also a big storer of oil — an advantage now given extremely elevated supplies. Many of the other energy-producing states are not large issuers of municipal debt,” according to a recent BlackRock note. 

Texas is MUB's third-largest state allocation, but at just 9 percent of MUB's weight, the Lone Star state does not even command half the weight the ETF devotes to New York. California is MUB's largest state weight at 23.1 percent.

Following Texas, MUB's exposure to major oil-producing states is scant. The ETF features munis issued by 48 states. The two missing: Major oil producers Louisiana and North Dakota. Additionally, Oklahoma is just a quarter of a percent of the ETF's weight.

A case can be made some municipal bonds are actually benefiting from lower oil prices.

“At a more granular level, consider that savings at the pump have traditionally resulted in increased tobacco consumption (the logic being that the excess cash is used to fund tobacco habits). We’ve seen evidence of this recently in the performance of corporate vs. municipal high yield. Whereas the energy sector wreaked havoc on corporate high yield last year, tobacco was the best-performing segment of the municipal high yield market. For investors, the key takeaway is that not all high yield is created equal,” adds BlackRock.