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Profit From This Top Ranked Municipal Bond ETF: MLN - ETF News And Commentary

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The $3.7 trillion U.S. muni bond market has been performing quite well this year after a lackluster 2013. Demand-supply imbalance, investors' desire for a tax-shelter, improving credit quality of many municipal bond issuers and a defensive sentiment prevailing in the market are behind the elevation of this segment in investors' eyes. As per Bloomberg , muni bonds exhibited the longest rally in two decades.

Muni added about 6% in the first five months of 2014 outpacing the return offered by the Treasuries, corporate bonds as well as the equity market represented by the S&P 500 Index. Investor's appetite for munis pushed the yields to an 11-month low.

Higher federal taxes and less bond issuance led munis to offer an extremely low yield. Notably, interests received from muni bonds are free of federal income tax (read: Worried About Taxes? Check 3 Muni Bond ETFs ).

Further, a flurry of investments in munis has been outpacing the issuances. As per Janney Montgomery , U.S. municipal-bond issuance will decline each year through 2017 to as low as $175 billion.

States are also finally returning to fiscal health. Bloomberg also notified that municipalities have borrowed $102 billion this year till May 23, reflecting the slowest rate since 2011. Though the U.S. is gradually gaining its lost strength and needs more infrastructural projects, outlook over borrowings remains subdued, as per a Moody's analyst. Also, muni bonds are known as relatively safer options than corporate bonds.

Additionally, after an appalling 2013, investors might want to play the unvalued yet promising fixed-income corner of the market. Even if rates rise by the end of this year, volatility will likely be in the short-end of the curve making long-term munis interesting bets at the current level (read: Deutsche Bank Launches Muni Bond, Utility ETFs ).

Given the bright prospects of the muni space, a look at one of the top ranked ETFs in the space could be a good way to target the best of the segment.

About the Zacks ETF Rank

The Zacks ETF Rank provides a recommendation for the ETF in the context of our outlook for the underlying industry, sector, style box or asset class (Read: Zacks ETF Rank Guide ). Our proprietary methodology also takes into account the risk preferences of investors. ETFs are ranked on a scale of 1 (Strong Buy) to 5 (Strong Sell) while these also receive one of three risk ratings, namely Low, Medium or High.

The aim of our models is to select the best ETFs within each risk category. We assign each ETF one of the five ranks within each risk bucket. Thus, the Zacks ETF Rank reflects the expected return of an ETF relative to other products with a similar level of risk.

For investors seeking to apply this methodology to their portfolio in the muni bond space, we have taken a closer look at the top-ranked MLN. This ETF has a Zacks ETF Rank of 2 or 'Buy' rating with a high risk outlook and is detailed below:

Market Vectors Long Municipal Index ETF ( MLN )

This fund looks to track the Barclays Capital AMT-Free Long Continuous Municipal Index. This Index intends to mainly measure the performance of long-duration U.S. muni bonds with nominal maturity of at least 17 years. Income from MLN is free of the Federal tax burden and the alternative minimum tax.

The ETF has managed an asset base of about $80 million which is invested in 148 bonds. Industrial bonds take the top spot in the portfolio with about 62.8% of focus followed by finance and Utilities. Maturity wise, more than 68% of the fund is targeted at bonds having 20-30 years of maturity trailed by 22% of assets invested in 15-20 years of maturity (see the full list of top ranked ETFs ).

The fund does not bear concentration risk as far as individual holdings are concerned. No asset accounts for more than 1.77% of the portfolio while MLN invests around 13.81% in its top 10 holdings.

The ETF targets the longer end on the yield curve with a weighted average maturity of 24.7 years. It is subject to high levels of interest rate risk primarily due to its long-term focus as indicated by a weighted average duration of 13.3 years.

But, in terms of credit risk, the ETF seems decently placed with investment grade bonds occupying 94% of the portfolio. The fund charges an expense ratio of 0.24% which makes it a cost-effective choice in the muni bonds ETF space.

Year-to-date, MLN has returned investors 11.6%. The fund is among the top-five returning muni-bond ETFs so far this year (also read: Top Ranked Muni Bond ETF in Focus: BABS ).

In the chart above, we have considered the price movement of the MLN. Its short-term moving average (9-Day EMA) is above the mid and long terms (50 and 200-Day EMA), suggesting some more room for run-up. Also, the product has traded in a tight range of $16.80-$19.98 per share over the past one year, indicating less chance of heightened volatility.

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MKT-VEC-LNG MUN (MLN): ETF Research Reports

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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