The Tell: Own a muni ETF? Here’s what midterm elections mean for the municipal bond market, according to this investment team


U.S. midterm elections have MacKay Municipal Managers, a team of municipal bond investors at MacKay Shields, watching closely for state ballot initiatives that may lead to policy change.

“On November 8th, 37 states will decide on 132 statewide ballot measures, slightly less than the average 164,” MacKay Municipal Managers said in a note on the elections. “Key topics will be voting-related polices, abortion, the legalization of marijuana, casino and online gambling as well as changes to state tax rate structure changes.”

Cannabis Watch: Maryland, Missouri voters seen as more cannabis-friendly as pot ballots await in five states

The muni bond team at MacKay, an investment firm owned by New York Life Investment Management, said in the note that they’re “closely watching proposed millionaire tax increases in California and Massachusetts, and a proposed reduction in the state flat tax rate in Colorado.”

MacKay Municipal Managers, which had $64 billion in assets under management at the end of September, is the subadviser for the IQ MacKay California Municipal Intermediate ETF
the IQ MacKay Municipal Insured ETF
the IQ MacKay Municipal Intermediate ETF

“Election results in federal Congressional races as well as state gubernatorial and legislative elections and state ballot measures will be impactful on the municipal market issuance,” wrote the MacKay team. “Policy agendas of state governments will influence future borrowings and priorities.”

They noted that the political party that controls the White House “tends tolose ground in Congress” during midterm elections.

Read: Watch these races tonight for early clues about the midterm elections, analysts say

“Several states are considering ballot measures to expand federal Medicaid programs to take advantage of federal and public healthcare support for low income adults and children,” the MacKay team said. Also, “several states are considering bills that would modify existing motor fuel consumption taxes to a vehicle miles traveled standard.”

This year, the team said it sees “much smaller amounts in bond issuance ballot measures.” They pointed to “only $4.9 billion” — including $4.2 billion tied to the State of New York’s environmental bond proposal — compared with more than $25 billion in 2018.

The IQ MacKay California Municipal Intermediate ETF, the IQ MacKay Municipal Insured ETF and the IQ MacKay Municipal Intermediate ETF –– all of which are actively managed –– have tumbled this year as the Federal Reserve aggressively raises interest rates to combat high inflation.

On a total return basis, the IQ MacKay California Municipal Intermediate ETF has lost 15.5% in 2022 through Monday, according to FactSet data. The IQ MacKay Municipal Insured ETF is down 15.9% over the same period, while the IQ MacKay Municipal Intermediate ETF’s loss is less deep at 11.4%.

Beyond the IndexIQ ETFs, the iShares National Muni Bond ETF

has lost 11% this year on a total return basis through Monday, while the Vanguard Tax-Exempt Bond ETF

is down 11.9%, FactSet data show.

“State ballot initiatives provide a means to implement policy change as well as approve debt financing programs,” MacKay Municipal Managers wrote. “While the midterm election results will provide much information about state and local governments’ policy paths, the number one issue going forward will be U.S. Federal Reserve policy moves through the end of the year and into 2023.”

Meanwhile, the U.S. stock market closed higher Tuesday, with the Dow Jones Industrial Average

up 1%, the S&P 500

rising 0.6% and the Nasdaq Composite advancing 0.5%, according to FactSet data.

See: The stock market and midterms: What investors expect as U.S. voters go to the polls

Market Extra: Short-term funding source for commercial real estate sees issuance tumble 80% from peak

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