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Today’s market backdrop is complex. The world started this year facing inflationary pressures and supply-chain disruptions as a result of the multi-year Covid-19 pandemic. Then, in February, new disaster struck — in terms of both humanitarian and financial market impacts — in the form of the Russia-Ukraine conflict.

The war in Ukraine is ongoing, inflationary pressures continue across the globe and financial markets continue to face volatility. 

The US Federal Reserve (Fed) has responded accordingly. The central bank introduced a 0.25% interest-rate hike in March, followed by a 0.50% hike in May. We're expecting five more increases throughout the year, two of which are likely to be 0.50%, as the Fed seeks to cool down the overheating economy and stabilize inflation. 

Investors seeking to hide from the market volatility while capturing yield could turn to the municipal (muni) ultra short arena. Here we outline the potential benefits of municipal ultra short strategies in this market environment.

Comparable total returns to longer maturity fixed-rate debt

While, as an asset class, municipal bonds underperformed during the first quarter, in our second-quarter outlook, we highlighted our reasons for optimism looking forward. We maintain that while rising interest rates and inflation present challenges to the muni market, they also present opportunities.

During the interest-rate hiking cycle from 2004-2006, muni ultra short strategies slightly outperformed fixed-rate paper (Chart 1). During the rate-hiking cycle from 2015-2018, on the other hand, muni ultra short slightly underperformed (Chart 2). But, as Chart 2 illustrates, while there was slight underperformance with municipal ultra short, there were fewer bumps along the way with than with fixed-rate, suggesting muni ultra short strategies could benefit investors seeking to dampen volatility more effectively.

Chart 1: Muni ultra short vs. fixed-rate performance, 2004 – 2006
This hiking cycle started with the first rate rise in June 2004 and ended with the last rise in June 2006

Source, abrdn, March 2022. Please refer to important information for key assumptions and blended index information for all charts.

Chart 2: Muni ultra short vs. fixed-rate performance, 2015 – 2018
This hiking cycle started with first rate rise in October 2015 and ended with last rise in December 2018

Source, abrdn, March 2022. Please refer to important information for key assumptions and blended index information for all charts.

Higher yields/income as Fed Funds move up

Muni ultra short yields tend to march higher as the Fed Funds rate increases. So, too, do their taxable equivalents (charts 3 and 4). In fact, on a taxable-equivalent basis, muni ultra short yields tend to trend higher in this situation than Fed Funds.

Chart 3: Municipal ultra short yields tend to increase with Fed rate hikes, 2004-2006
This hiking cycle started with the first rate rise in June 2004 and ended with last rise in June 2006

Source: abrdn, March 2022. Please refer to important information for key assumptions and index information for all charts. Taxable Equivalent Yield Calculated as Blend yield /(1-.37)

Chart 4: Municipal ultra short yields tend to increase with Fed rate hikes, 2015 - 2018
This hiking cycle started with the first rate rise in October 2015 and ended with last rise in December 2018

Source: abrdn, March 2022. Please refer to important information for key assumptions and index information for all charts. Taxable Equivalent Yield Calculated as Blend yield /(1-.37)

Relative NAV stability

Historically NAV stability has held up in ultra short strategies compared to fixed-rate strategies (charts 5 and 6). Investors can probably expect yields to tick up as the Fed tightens interest rates, which helps to make the case for ultra short strategies.

In addition, ultra short strategies can provide a compelling place to hide from NAV swings that tend to hit other asset classes harder. Given the geopolitical instability that the Russia-Ukraine conflict is causing and its global macroeconomic repercussions, NAV price swings are distinctly possible.

Chart 5: Price volatility – muni ultra short vs. fixed rate, 2004-2006
This hiking cycle started with the first rate rise in June 2004 and ended with the last rise in June 2006

Source: abrdn, March 2022. Please refer to important information for key assumptions and index information for all charts.

Chart 6: Price volatility – muni ultra short vs. fixed rate, 2015-2018
This hiking cycle started with the first rate rise in October 2015 and ended with last rise in December 2018

Source: abrdn, March 2022. Please refer to important information for key assumptions and index information for all charts.

Municipal vs. taxable ultra short

It’s worth noting that, while the two get lumped together sometimes, muni ultra short isn’t the same as taxable ultra short. In terms of yield, taxable ultra short has historically tracked well during Fed Funds rate changes, but it’s more susceptible to NAV fluctuations than muni ultra short. We can see an example of this from March 2020.

The reason that muni ultra short strategies may experience less volatility than their taxable counterparts during times of shifting Fed policy is a difference in their components. Muni ultra short strategies comprise more heavily of variable-rate demand notes (VRDNs) than taxable ultra short strategies, which use mainly short-dated fixed-rate securities and floating-rate notes.

This difference matters because VRDN yields fluctuate based on short-term interest rates, but their price always trades at par ($100). Taxable floating-rate notes, on the other hand, are more sensitive to both yield changes and price changes. So, the journey along the Fed path may be more volatile with taxable ultra short than muni ultra short strategies, even if both generate similar yields.

The case for muni ultra short

Times of rising interest rates can be stressful for investors. We believe that ultra short strategies offer a compelling opportunity for investors seeking to dampen volatility while receiving yield. Muni ultra shorts also offer appeal because of their tax advantages, giving added benefits to investors.

 

IMPORTANT INFORMATION

Charts 1-6: Blend = 50% SIFMA Municipal Swap Index Yield and 50% Bloomberg Municipal Bond 1 Year (1-2) Total Return Index Unhedged USD. Index = Bloomberg Municipal 1-3 Index. All securities priced at par from the SIFMA Index. Important information regarding SIFMA and MSRB.

Fixed income securities are subject to certain risks including, but not limited to: interest rate (changes in interest rates may cause a decline in the market value of an investment), credit (changes in the financial condition of the issuer, borrower, counterparty, or underlying collateral), prepayment (debt issuers may repay or refinance their loans or obligations earlier than anticipated), call (some bonds allow the issuer to call a bond for redemption before it matures), and extension (principal repayments may not occur as quickly as anticipated, causing the expected maturity of a security to increase).

Municipal securities can be affected by adverse tax, legislative or political changes and the financial condition of the issuers of municipal securities.

Indexes are unmanaged and have been provided for comparison purposes only. No fees or expenses are reflected. You cannot invest directly in an index.

US-190522-175228-2

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Important Risks

The abrdn Gold ETF Trust, abrdn Silver ETF Trust, abrdn Precious Metals Basket ETF Trust, abrdn Platinum ETF Trust and abrdn Palladium ETF Trust are not investment companies registered under the Investment Company Act of 1940 or a commodity pool for purposes of the Commodity Exchange Act. Shares of the Trusts are not subject to the same regulatory requirements as mutual funds. These investments are not suitable for all investors. Trusts focusing on a single commodity generally experience greater volatility.

Commodities generally are volatile and are not suitable for all investors. Trusts focusing on a single commodity generally experience greater volatility. Please refer to the prospectus for complete information regarding all risks associated with the Trusts. Shares in the Trusts are not FDIC insured and may lose value and have no bank guarantee.

The value of the Shares relates directly to the value of the precious metal held by the Trust and fluctuations in the price could materially adversely affect investment in the Shares. Several factors may affect the price of precious metals, including:

A change in economic conditions, such as a recession, can adversely affect the price of the precious metal held by the Trust. Some metals are used in a wide range of industrial applications, and an economic downturn could have a negative impact on its demand and, consequently, its price and the price of the Shares;

Investors’ expectations with respect to the rate of inflation;

Currency exchange rates;

Interest rates;

Investment and trading activities of hedge funds and commodity funds; and

Global or regional political, economic or financial events and situations. Should there be an increase in the level of hedge activity of the precious metal held by the trust or producing companies, it could cause a decline in world precious metal prices, adversely affecting the price of the Shares. Should there be an increase in the level of hedge activity of the precious metal held by the Trusts or producing companies, it could cause a decline in world precious metal prices, adversely affecting the price of the shares.

Also, should the speculative community take a negative view towards the precious metal held by the Trusts, it could cause a decline in prices, negatively impacting the price of the shares. There is a risk that part or all of the Trusts’ physical precious metal could be lost, damaged or stolen. Failure by the Custodian or Sub-Custodian to exercise due care in the safekeeping of the precious metal held by the Trusts could result in a loss to the Trusts.

The Trusts will not insure its precious metals and shareholders cannot be assured that the custodian will maintain adequate insurance or any insurance with respect to the precious metals held by the custodian on behalf of the Trust. Consequently, a loss may be suffered with respect to the Trust’s precious metal that is not covered by insurance.

Commodities generally are volatile and are not suitable for all investors.

Investors buy and sell shares on a secondary market (i.e., not directly from Trusts). Only market makers or "authorized participants" may trade directly with the Trusts, typically in blocks of 25k to 100k shares.

Commodities generally are volatile and are not suitable for all investors. This material must be accompanied or preceded by the prospectus. Carefully consider each Trust’s investment objectives, risk factors, and fees and expenses before investing. Please click here to review the prospectus.

ALPS Distributors, Inc. is the marketing agent for the abrdn Gold ETF Trust, abrdn Silver ETF Trust, abrdn Precious Metals Basket ETF Trust, abrdn Platinum ETF Trust and abrdn Palladium ETF Trust.

ALPS Distributors, Inc. is the distributor for abrdn ETFs.

ALPS Distributors, Inc. is not affiliated with the companies of abrdn.

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An investor should consider the investment objectives, risks, charges and expenses of the ETFs carefully before investing. To obtain a prospectus containing this and other important information, call 1-844-383-7289 or visit www.abrdn.com/us/etf. Read the prospectus carefully before investing.

Fund Risk: There are risks associated with investing including possible loss of principal. Commodities generally are volatile and are not suitable for all investors. There can be no assurance that the Fund’s investment objective will be met at any time. The commodities markets and the prices of various commodities may fluctuate widely based on a variety of factors. Because the Fund's performance is linked to the performance of highly volatile commodities, investors should consider purchasing shares of the Fund only as part of an overall diversified portfolio and should be willing to assume the risks of potentially significant fluctuations in the value of the Fund. Actively managed ETFs do not necessarily seek to replicate the performance of a specified index. Actively managed ETFs are subject to risks similar to stocks, including those related to short selling and margin maintenance. The Fund’s return may not match the return of the index.

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Changes in the laws of the United States and/or the Cayman Islands, under which the Fund and the Subsidiary are organized, respectively, could result in the inability of the Subsidiary to operate as intended and could negatively affect the Fund and its shareholders.

To the extent the Fund is exposed directly or indirectly to leverage (through investments in commodities futures contracts) the value of that Fund may be more volatile than if no leverage were present.

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The abrdn Bloomberg Industrial Metals K-1 Free ETF is new and has limited operating history.

“Bloomberg®” and “Bloomberg Commodity Index Total ReturnSM,” “Bloomberg Commodity Index 3 Month ForwardSM” and “Bloomberg Industrial Metals Subindex Total ReturnSM” are service marks of Bloomberg Finance L.P. and its affiliates, including Bloomberg Index Services Limited (“BISL”), the administrator of the indices (collectively, “Bloomberg”) and have been licensed for use for certain purposes by abrdn ETFs Advisors LLC. Bloomberg is not affiliated with abrdn ETFs Advisors LLC, and Bloomberg does not approve, endorse, review, or recommend abrdn Bloomberg All Commodity Strategy K-1 Free ETF (BCI), abrdn Bloomberg All Commodity Longer Dated Strategy K-1 Free ETF (BCD), and abrdn Bloomberg Industrial Metals K-1 Free ETF (BCIM). Bloomberg does not guarantee the timeliness, accurateness, or completeness of any data or information relating to Bloomberg Commodity Index Total Return, Bloomberg Commodity Index 3 Month Forward” and “Bloomberg Industrial Metals Subindex Total Return".

Please see the current prospectus, www.abrdn.com/us/etf for more information regarding the risk associated with an investment in the Funds.

S&P 500: The S&P 500 Index is the Standard & Poor’s composite index of 500 stocks, a widely recognized, unmanaged index of common stock prices.

Standard Deviation: Standard deviation is a statistical measure of the extent to which returns of an asset vary from its average.

Bloomberg Commodity Index: The Bloomberg Commodity Index (BCOM) is a broadly diversified commodity price index distributed by Bloomberg Indexes.

Discount- A situation when the share price of a fund trades below its net asset value.

Premium- A situation when the share price of a fund trades above its net asset value.

The Bloomberg Barclays US Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market.

Annualized Volatility is a statistical measure of the dispersion of returns for a given security or market index

Beta is a measure of the volatility, or systematic risk, of an individual stock in comparison to the unsystematic risk of the entire market

Sharpe ratio is the average return earned in excess of the risk-free rate per unit of volatility or total risk
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