NVG ETF: Muni Fund To Buy Hand Over Fist (NYSE:NVG)

Introduction

Muni Funds are attractive in 2024 due to the NAV discounts and high yields. Income investors will certainly find the 7% tax-exempted yield extremely appealing. The funds’ performance has been solid so far in 2024 after a big rally in the last two months of 2023. However, last week, particularly last Friday, may send a true wake-up call to the long-duration and high-quality credit market. In fact, the 20+ Year Treasury Bond rallied big time on Friday alone and closed the day with over 3% while the equity market tanked about 2%. That trend seemed to be the theme for the whole week. I believe this is just the beginning. Long bonds including the Muni bond market will kick off another powerful rally in the rest of 2024.

Nuveen AMT-Free Municipal Credit Income Fund (NYSE:NVG) is one of the best Muni funds managed by Nuveen. With a tax-exempted 7.36% yield (monthly payment) and a NAV discount of 8.52%, NVG is one of the best deals in the long end of the duration spectrum. I have an initial position in my income portfolio and I plan to add substantial positions soon.

NVG Highlight

NVG is a Muni CEF managed by Nuveen. The following official description can be found on the Nuveen website.

The Fund’s investment objectives are to provide current income exempt from regular federal income tax and to enhance portfolio value relative to the municipal bond market by investing in tax-exempt municipal bonds

The ETF is focused on tax-exempt income from a portfolio of municipal bonds.

It can be seen from the following portfolio breakdown that 99.72% is Municipal bonds with 51% rated A or higher.

The bond sectors show over 32% in Tax Obligation, which is very safe. 15% in HealthCare and 10.4% in Transportation represent some of the best offerings at the municipal level.

As shown below, NVG has a duration of around 7 years, which is a bit shorter than the 10 years seen in the other Nuveen Muni funds (see more in the next section).

Nuveen has raised the distribution aggressively most recently in July following April’s increase. Considering the high leverage of the fund, this is a very aggressive move from the management to keep the fund attractive to investors.

The fund recently has attracted attentions from many funds, with good ratings from Morningstar. Notice the increased buying amounts, which are quite substantial in some cases, as shown below.

NVG – AMT-Free Municipal Credit Income Fund.

• AUM: $3.84 B. It is one of the largest Muni funds.
• Volume (last day): 685,973.
• Yield: 7.33%. Tax-exempted high yield.
• NAV(Discount): 9.46%.
• Risk Score (Morningstar): 25. It is considered “Moderate”.
• Credit (A or higher): 51.1%. Unrated:26.2%
• Duration (modified): 7.21 years.
• Leverage: 39.4%

Notice that NVG has the highest leverage in the NUV Muni funds. It is expected to work well during the rate declining cycle.

Market is showing a strong signal to buy Muni.

I recommended a buy on NEA and think it is a “Smart Buy For Continued Bounce-Back Muni Market In 2024“. NVG is a bit more aggressive than NEA with a higher leverage. The rate-cut will have a more positive effect in reducing the leverage cost.

I think FED should have cut the rate in their meeting last week since there has been enough data to show a weakening US economy. I believe one more round of alarming data will push the cut hesitation over the edge. The stock market sounded a loud signal last Friday by dipping down sharply.

Last Friday, VIX reached to 29.40 intraday, which is viewed as “panic mode”, but closed at 23.39. On August 5, VIX reached over 60 at the high, a level not seen since COVID-19 pandemic in 2020.

It is probably too early to call a recessionary “hard landing” from a promising “soft-landing” just a couple of weeks ago. VIX had shown a real concern from the market and that the equity could be in trouble in the near term. I expect to see some kind of rotations to happen in full swing due to:

• Recessionary worries, risk-on to risk-off defensive long T-Bonds and Muni bonds.
• A rate declining cycle that could start in September. It will attract money from short duration to long.

The long bond will continue to see upward movement in the near future. I have been moving my significant portion of Muni market funds to high-yield Muni funds. I plan to accelerate the process as the buy signal is as strong as it can be.

The journey to a full recovery is starting.

The Muni bond market also looks promising in the longer run. Muni crashed in 2022 together with the general bond market. There is an ample room for the price to recover back to the previous high. The tailwinds from the rate cut and market rotation could propel Muni funds much higher from the current level.

The following is a list of selected Nuveen Muni funds with key characteristics to show their return potentials.

NEA – AMT-Free Quality Muni

• AUM: $3.85B. It is the largest Muni fund from Nuveen.
• Volume (last day): 1,176,564.
• Yield: 7.5%. Tax-exempted high yield.
• NAV(Discount): 10.34%. It is a double-digit discount.
• Risk Score (Morningstar): 22. It is considered “Conservative”; less aggressive than NVG.
• Credit (A or higher): 74.5%. Unrated:12.50%.
• Duration (modified): 10.21 years.
• Leverage: 39.1%

NMZ – Municipal High Income Opportunity Fund. 4-star rated (Morningstar)

• AUM: $1.30B.
• Volume (last day): 605,109.
• Yield: 7.2%. Tax-exempted high yield.
• NAV(Discount): 8.61%.
• Risk Score (Morningstar): 29. Most aggressive in four for the biggest discount.
• Credit (A or higher): 28.2%. Unrated:51.40%. The credit is not as good.
• Duration (modified): 7.21 years.
• Leverage: 38.5%.

NAD – Nuveen Quality Muni Income Fund. 4-star rated (Morningstar)

• AUM: $3.11B. It is a large Muni fund.
• Volume (last day): 1,176,564.
• Yield: 7.58%. Tax-exempted high yield.
• NAV(Discount): 10.7%. It is a double-digit discount.
• Risk Score (Morningstar): 22.
• Credit (A or higher): 69.8%. Unrated: 12.7%.
• Duration (modified): 10.21 years.
• Leverage: 40.1%. It is the most leveraged Muni fund by just a slight amount.

Nuveen’s Muni funds are known for using high leverages (close to 40%). The leverage is designed to boost the return from the fund. It will work well in favorable lower rate situations where the cost of the leverage will be lower. On the other hand, the risk of deploying leverage is also noticeable. Please see more details about the risk in the next section.

Risks & Caveats

High leverage, such as 40% for NVG could work against the fund’s performance if the interest rate stays high, such as in the “higher-for-longer” condition. The management team has apparently pushed the limit by raising the distribution in hoping for a lower and sooner rate cut. The US economy is still sending mixed, changing signals, including Q2’s much better GDP growth. Perhaps it is too early to call either a “soft landing” or “hard landing”. The Muni bond market could still run into trouble if the rate had to stay high.

On the other hand, a recession will certainly cause the default rate to go up, which in turn will have negative impacts on some holdings of the fund. Investors should keep watching the default rate and macroeconomic conditions very carefully.

Conclusion

The equity market is having big concerns over the evidently slowing US economy. Long bond yields are starting to drop down quickly. The FED rate cut in Sept is almost a certainty. Muni bond funds like NVG with high leverage, deep discounts, and a tax-free 7.4% dividend are best positioned under these conditions. I initially recommend a buy rating on NVG with a bias towards (aggressive) strong buy for its near-term price upside potentials.