Bond ETF HYD: Potential Winner for 2025

Many people might not find municipal bonds the most thrilling investment, but as we look ahead to 2025, they are getting some positive attention. Some experts are even suggesting that income-focused investors should consider adding some municipal bond credit risk to their portfolios in the coming year. And thanks to exchange-traded funds like the VanEck High Yield Muni ETF (HYD), this can be done with ease.

HYD tracks the ICE Broad High Yield Crossover Municipal Index and has already proven to be a rewarding choice for investors willing to take on a bit more credit risk. In fact, this ETF has outperformed the largest fund in its category by more than 2-to-1 this year.

For those who might not be familiar with lower-rated munis, it’s worth noting that these bonds actually carry less risk than their junk-rated corporate counterparts. Plus, muni defaults are significantly less common compared to corporate defaults. Despite the slightly increased risk, HYD offers decent compensation with a 30-day SEC yield of 4.20%, which is 90 basis points higher than the ICE AMT-Free US National Municipal Index.

Looking ahead to next year, there are some factors to consider for muni investors. Experts are predicting that the beginning of 2025 could pose some challenges for municipal debt, largely due to discussions around the Tax Cuts and Jobs Act (TCJA) of 2017. With uncertainties surrounding potential concessions and extensions of the TCJA, the political landscape could impact munis and ETFs like HYD. However, once these hurdles subside, there could be upside potential for investors.

Municipal bonds continue to be a relevant choice for affluent investors, offering attractive yields that are especially appealing when considering taxes. In fact, the yield on the Bloomberg Municipal Bond Index was 3.4% as of December 3, 2024, equivalent to roughly 7% for a fully taxable bond in high-tax states like New York or California.

In terms of yield and risk-reward balance, municipal bonds are looking compelling when compared to other segments of the bond market. As fixed income experts suggest, muni yields, especially after accounting for taxes, are attractive relative to their risks.

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