Victory's two new municipal ETFs list at fees a waiver is holding down

Victory Capital listed two municipal bond ETFs on Nasdaq on Wednesday, September 23, and the low fees on both last only while the firm covers part of the cost.

Both are run by a manager. The VictoryShares Municipal High Yield ETF, —VMHY, seeks municipal bonds the prospectus calls high-yield. The VictoryShares Short-Duration Municipal ETF, —VMSD, seeks tax-exempt income with less sensitivity to interest rates. Prospectuses dated Monday, September 21 put the fee after the waiver at 0.34% for —VMHY and 0.18% for —VMSD. Before the waiver, the annual cost is 0.77% and 0.62%.

The prospectuses estimate other expenses at 0.47% for the current fiscal year, and that estimate is most of the full cost in each fund. Victory Capital Management, the adviser, has agreed to hold annual operating expenses at those lower figures through at least October 31, 2027. The promise does not cover interest, taxes and brokerage.

For up to three years after the fiscal year of the waiver, Victory can take those waived fees back, as long as the annual cost stays inside the cap. Only the fund's board can end the agreement.

The names are narrower than the rules

—VMHY has no duration target, and it may buy municipal bonds of any maturity.

The prospectus defines high-yield as bonds rated, at purchase, Baa1 or lower by Moody's or BBB+ or lower by S&P, or unrated bonds the adviser judges comparable. It calls those bonds speculative. The floor of that definition, Baa1 and BBB+, is still investment grade, and Victory says the fund also holds investment-grade municipal securities.

The prospectus lets the fund buy or sell credit protection through credit default swaps. Selling that protection means taking a fee to bear a borrower's default risk. The fund does not have to use the swaps.

—VMSD invests mainly in higher-rated municipal bonds. Short, in this fund, is a duration band, not a maturity cap.

It aims to keep effective duration, a measure of how much the price moves when rates change, no more than two years shorter or longer than the Bloomberg Municipal Bond 3 Year (2-4) Total Return Index. That index is investment-grade tax-exempt bonds with two to four years left to mature.

—VMSD may still buy bonds of any maturity. Up to 20% of it can be high-yield.

The shelf was already full

On Monday, October 5, VanEck High Yield Muni ETF, AHYD, a fund that tracks an index of high-yield municipal bonds, charged 0.32% and held $3.92 billion. iShares Short-Term National Muni Bond ETF, ASUB, a fund that tracks an index of short-term municipal bonds, charged 0.07% and held $11.9 billion. iShares Short Maturity Municipal Bond Active ETF, BMEAR, an actively managed fund of short-maturity municipal bonds, charged 0.26% and held $1.45 billion.

On Thursday, October 1, New York Life Investment Management listed a rival at the same subsidized fee. The NYLIM MacKay Muni High Income ETF, —MMHI, an actively managed municipal bond fund, trades on NYSE Arca. Its prospectus dated Tuesday, September 22 puts total annual expenses at 0.69% and the fee after a 0.35% waiver at 0.34%.

A waiver that caps expenses at 0.40% stays in place unless the board ends it. The further waiver, the one that reaches 0.34%, runs only until August 28, 2027.

On Monday, October 5, —VMHY held $22.4 million and —VMSD held $22.5 million. Neither fund has a record of its own.

Holdings as of Sunday, October 4 showed 27 positions in —VMHY and 28 in —VMSD, against 1,940 in AHYD. As of Wednesday, September 30, ASUB held 2,954 positions and BMEAR held 266.

—VMSD's 0.18% is below BMEAR and more than twice ASUB's 0.07%. The prospectus cost of 0.62% is above both.

—VMHY's 0.34% is already 0.02 percentage points above AHYD's 0.32%, and the 0.77% in the prospectus is more than twice that fee.