The Mairs & Power Minnesota Municipal Bond Exchange Traded Fund (ETF) recently celebrated a year since its inception as Minnesota’s first and only municipal bond ETF. As we head into the second quarter of 2022, we asked Brent Miller, lead manager of MINN, to give a year-in-review, an update on the state of the market, and insight into the future of MINN.
Executive Summary
MINN was launched in March of 2021, and today there are more than 80 bonds in the portfolio.
All investments sit within Minnesota (none in Puerto Rico, Guam, or the Virgin Islands), which not true of any other Minnesota Municipal Fund.
Sticking to the plan
More than 75% of the portfolio has a credit rating of AA or higher, with 2/3 in general obligation bonds. The expense ratio remains low at 39 basis points, with no intention of raising that expense ratio.
We maintain a clear income bias in the portfolio with a low appetite for risk because a higher quality portfolio is important to produce steady, quality income.
In the first year, we invested for credit quality and for maturity, often in the 6-to-20-year range, which is where we found value. We searched out adequate yield with acceptable risk, and most of that was found in the 6-to-20-year bucket for maturities. As a result, the yield from our fund has come more from duration risk than credit risk, which we think is appropriate for long-term investing.
For anyone who lives in Minnesota, or has spent time in the state, our holdings are a recognizable list of Minnesota. We are headquartered in St. Paul, and we live and work in Minnesota, so we know these areas and invest in what we know well.
What Happened in the Fixed Income Market?
In the last 12 months, the fixed income market has experienced an unprecedented environment.
- Exceptionally low ratios of municipal bond yield to Treasury bond yields.
- The Federal Reserve (Fed) stepped off the gas in reaction to inflation
- An increase in interest rates and rewriting of municipal ratios caused a double hit for municipal bonds.
A side note on interest rates: Mairs & Power doesn’t make big interest rate bets or short-term interest rate calls. We’re focused on the long run and that’s how we’ll continue to invest, looking for good value for a long-term holding.
An additional factor is specific to Minnesota. While we saw a record year of municipal bond issuance across the country, Minnesota issuance was down 18% year-over-year, which tightened the Minnesota market compared to the overall municipal bond market.
Why Invest in MINN?
In the last five years, the attractiveness of municipal bonds hasn’t been this good for an extended period and there are good, long-term values available. So, why invest in MINN?
- The rerating of municipal bonds has largely already happened compared to treasuries
- Uptick in new issuance activity in the Minnesota municipal bond world
- It’s a great option for long-term holders in higher tax brackets
Yes, we saw relative underperformance because of the shift in fixed income markets, and specifically the municipal markets. But we’re not focused on quarterly returns. We want to produce income for the long run.
We’re also asking ourselves: Over the next 10 years, what kind of pressures will municipalities face? We think the inflationary environment might change the credit work we would have done 10 years ago to compare to the credit work we’re doing today. We know that wage inflation can creep in, and we want to be careful where we’re investing. That leaves us with a preference and a bias toward general obligation bonds where you have unlimited taxing power on a tax base to raise taxes and pay back debt.
And what was true a year ago is still true today: MINN has a quality portfolio and a low expense ratio for a long holding period, and we’re providing reliable income over that holding period because by investing in quality.
Click here for a complete list of MINN holdings.
Duration is a measure of the sensitivity of the price of a bond or other debt instrument to a change in interest rates.
Basis point is a unit of measure for interest rates and other percentages in finance. One basis point is equal to 1/100th of 1%, or 0.01%, or 0.0001.
The statements and opinions expressed are those of the speakers and are as of the date of this call. All information is historical and not indicative of future results and subject to change.
Scott Howard is a registered representative of Foreside Fund Services, LLC.