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MMIN IQ Mackay Municipal Insured ETF interests me at this time as one way to mitigate muni default risk. Recent performance has been good, all holdings insured munis, duration moderate at 6. Looking to invest cash into bonds in taxable account. Daily volume not as large as I’d prefer, but acceptable.Thoughts greatly appreciated! Take care all, Rick
I admit to being skeptical of monoline muni bond insurers after their 2008 collapse. Keep that in mind when reading my comments.
The basic function of insurance is to spread risk. So long as one can expect defaults to be isolated cases and not the result of some systemic problem, insurance works well. (Insurers are financially stressed when there are a lot of hurricanes, fires, or a market implosion.)
To protect against the, say, 1 in 100 chance that a bond defaults, each bond shaves a little off its yield to pay for insurance to cover that 1 bond in 100. Diversification does something similar. If you own 100 uninsured bonds, and one fails, you'll have lost 1%, just as if each uninsured bond had paid 1% to the insurer to be covered.
The ability of a fund to diversify away individual bond risk seems to reduce the value of insurance to a fund holder, as contrasted with its value to an underdiversified individual bond investor.
I also wonder about the low penetration (around 6%) of insurance in the muni bond market. Before 2008, penetration was well over half. Funds that are not required to buy insured munis are still free to do so. Yet they typically buy A/BBB bonds. Either because they don't find enough investors like you looking for that extra protection, or because they don't feel the reduced risk is worth the cost of the insurance.
Since you're interested in high quality (AA) bonds, you might also consider TEPFX. Over virtually the life of MMIN (since Oct 23, 2017), it has returned a cumulative 7.21% vs. 7.93% for MMIN (using M*'s new performance graphs, not linkable).
But it has done so with lower volatility, e.g. TEPFX had a drawdown of 6.4% vs. MMIN drawdown of 13.9% from March 9 through March 20). Figures computed from Yahoo Finance tables. That's due in part to TEPFX's shorter effective duration of 3.14 years vs. MMIN's 6.19 years (both per M*).
TEPFX's portfolio has a weighted average credit rating of AA, the same as MMIN. It's got around 40% AAA rated and 40% AA rated. In contrast, MMIN has virtually no AAA rated bonds (muni insurers are only rated AA and it wouldn't make sense for a natural AAA bond to buy lower grade insurance). Though a huge 90% of MMIN's bonds are rated AA (since they're almost all insured).
Finally, despite the shorter duration, TEPFX's SEC yield is higher, 1.39% vs. 1.22%, both figures as of Sept. 30th. I haven't yet looked into how TEPFX manages that trick.
Comments
The basic function of insurance is to spread risk. So long as one can expect defaults to be isolated cases and not the result of some systemic problem, insurance works well. (Insurers are financially stressed when there are a lot of hurricanes, fires, or a market implosion.)
To protect against the, say, 1 in 100 chance that a bond defaults, each bond shaves a little off its yield to pay for insurance to cover that 1 bond in 100. Diversification does something similar. If you own 100 uninsured bonds, and one fails, you'll have lost 1%, just as if each uninsured bond had paid 1% to the insurer to be covered.
The ability of a fund to diversify away individual bond risk seems to reduce the value of insurance to a fund holder, as contrasted with its value to an underdiversified individual bond investor.
I also wonder about the low penetration (around 6%) of insurance in the muni bond market. Before 2008, penetration was well over half. Funds that are not required to buy insured munis are still free to do so. Yet they typically buy A/BBB bonds. Either because they don't find enough investors like you looking for that extra protection, or because they don't feel the reduced risk is worth the cost of the insurance.
Since you're interested in high quality (AA) bonds, you might also consider TEPFX. Over virtually the life of MMIN (since Oct 23, 2017), it has returned a cumulative 7.21% vs. 7.93% for MMIN (using M*'s new performance graphs, not linkable).
But it has done so with lower volatility, e.g. TEPFX had a drawdown of 6.4% vs. MMIN drawdown of 13.9% from March 9 through March 20). Figures computed from Yahoo Finance tables. That's due in part to TEPFX's shorter effective duration of 3.14 years vs. MMIN's 6.19 years (both per M*).
TEPFX's portfolio has a weighted average credit rating of AA, the same as MMIN. It's got around 40% AAA rated and 40% AA rated. In contrast, MMIN has virtually no AAA rated bonds (muni insurers are only rated AA and it wouldn't make sense for a natural AAA bond to buy lower grade insurance). Though a huge 90% of MMIN's bonds are rated AA (since they're almost all insured).
Finally, despite the shorter duration, TEPFX's SEC yield is higher, 1.39% vs. 1.22%, both figures as of Sept. 30th. I haven't yet looked into how TEPFX manages that trick.