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Junk Munis ? Market Vectors High Yield Municipal Bond ETF (HYD)

Market Vectors High Yield Municipal Bond ETF (HYD)

This ETF was one of our picks for 2011, and delivered such an impressive return that we felt compelled to include it once again for the upcoming year. As the name suggests, HYD focuses on debt securities from municipal issuers that receive below investment grade ratings. Specifically, the underlying index consists of a 75% weight in below investment grade securities and a 25% allocation to Baa / BBB-rated bonds. Many of the securities found in HYD come from arrangements between municipalities and private corporations, which explains why about a quarter of the portfolio is dedicated to tobacco-related issuers [see High Yield ETFdb Portfolio].

Given the anxiety over the health of the muni bond market-especially high yield muni bonds with less-than-perfect credit ratings-it shouldn't be surprising that HYD can make a potentially attractive payout. For investors in the 25% tax bracket, the tax equivalent 30 day SEC yield is in the neighborhood of 7.7%; those in the top 35% bracket can get a return equivalent closer to 8.8%.


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