Recently, Detroit, with its $18 billion in debt, became the
largest municipality to file for bankruptcy in the nation's
history. The city has struggled for decades with a shrinking
population (and tax base), crime, and jobs troubles, all of which
came to a head in this historic filing.
While the bankruptcy was initially halted by a State Court-due
to a Michigan law that protects pensions-a Federal Bankruptcy
judge has ruled that it could go forward, basing the ruling on
the idea that the city and its residents would suffer irreparable
harm if restructuring efforts were stalled. "In the context of a
Chapter 9 case, and especially this Chapter 9 case, that is
probably the most important factor of all"
said Judge Steven Rhodes
, allowing the case to continue.
If this holds up, it looks to allow Detroit to shed some of
its costs and get back to some semblance of sustainability.
However, the move will likely be closely watched by a number of
other highly-indebted municipalities, which are probably not too
far off from bankruptcy themselves either (read
3 Oversold Bond ETFs to Buy on the Rebound
The bankruptcy proceedings have also thrown a bit of risk back
into the municipal bond market, at a time when most are skittish
about bonds anyway. Given this, investors who have muni bond
holdings may want to consider keeping a watchful eye on the
space, as it could be a harbinger of things to come across the
nation in a number of municipalities.
An easy way to do that is by looking at broad muni bond
, of which there are many in the market. These funds have all
been under a little pressure lately, in light of both the
bankruptcy issues and rising Treasury rates, and could face rocky
trading in the next few months too.
In particular though, the following muni bond ETFs could be
ones to watch in order to ascertain how the broad muni market is
dealing with the uncertain economic environment:
There are a number of popular broad muni bond market ETFs out
there which could be impacted by increased worries over municipal
bond finances. These are investment grade-focused funds though,
so hopefully they will not be as impacted by the growing
concerns. Some of the top options include:
- Arguably this multi-billion dollar ETF is the best
for broad exposure to the market. The fund holds over 2,000
securities in its basket, focusing on mid and long term
securities from a number of states. MUB is down about 1.7% in the
past 10 days (see
Bond ETFs Experience Outflows
- This SPDR ETF is also a popular choice for muni bond investing,
as it has over one billion dollars in assets and sees more than
350,000 shares in volume a day. The ETF does hold far fewer
securities in its basket though, with just under 500 companies in
the fund. TFI is down roughly 1.2% in the past 10 days.
For a low risk way to target the market, investors have a few
options. In particular, either the insured or short-duration
segments could be solid choices for this type of exposure.
These funds should be better positioned than most in this type
of environment, especially if rates continue to rise.
Furthermore, if the pain starts to hit these products, then that
could signal some serious trouble for the broad muni bond space.
Choices in this market include:
- This SPDR ETF is a very popular muni bond fund that has a
decided focus on the short end of the curve, holding about 500
bonds in its basket. The fund also sees solid volume on a good
AUM, suggesting decent bid ask spreads as well. Over the past 10
days, this ETF has actually added about 0.3%, bucking the trend
in the space (see
Are Short Term Bond ETFs the New Safe Haven?
- This ETF doesn't focus on short term bonds but it does look to
offer a lower risk level thanks to the 'insured' nature of its
securities. This looks to give a lower credit default risk
profile, though duration risk will be quite high here. Thanks to
this, PZA has actually lost about 2% in the past ten day
- Another short-term option for muni bond investors is PZA, an
ETF that holds securities that have a maturity between one
month and five years. In total, the ETF has about 700 bonds in
its portfolio, with exposure stretching across a variety of
states. This fund has also had a decent performance in the past
ten days, losing about 0.2% in the time frame.
High yield muni bond ETFs could be especially impacted by the
recent trends in the market. These types of securities already
hold high risk securities, and more big bankruptcies-or a
possible trend towards that end-could be disastrous for the
Still, payouts in this space are elevated, so lower duration
securities may be less impacted by a rising rate environment.
Plus, if Detroit turns out to be an isolated event, these could
rebound in the months ahead. Options here include:
- This is the most popular high yield muni bond fund on the
market, with just under $900 million in assets. The product holds
about 300 securities in its portfolio, and interestingly, has a
very small allocation to City of Detroit bonds (less than 0.1%)
in the product. The fund has declindeb y 1.5% over the past 10
Comprehensive Guide to U.S. Junk Bond ETF
- This ETF is also a solid option for broad exposure to the high
yield muni bond market, giving access to about 260 companies in
the space. Exposure is well spread out across a number of local
bonds, while City of Detroit Sewage Disposal System Revenue Bonds
account for 0.4% of the total. The fund has been one of the worst
performers on the list in the past ten days, losing roughly 2.9%
in the time frame.
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MKT VEC-HY MUNI (HYD): ETF Research Reports
SPDR-NU SP HYMB (HYMB): ETF Research Reports
ISHARS-NAMTF (MUB): ETF Research Reports
PWRSH-IN NAT MB (PZA): ETF Research Reports
SPDR-NB ST MB (SHM): ETF Research Reports
ISHARS-ST N AM (SUB): ETF Research Reports
SPDR-NB MUNI BD (TFI): ETF Research Reports
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