While the ETF industry has grown significantly in recent years, there are still “firsts” to be had. X-Square Capital can now lay claim to one of them, launching the very first Puerto Rico Muni ETF. The X-Square Municipal Tax Income Free ETF (ZTAX) invests not only in Puerto Rico bonds but also in U.S. Virgin Islands and Guam government debt.
The ETF arrives into a renewed landscape for fixed income, with the income back in the picture. The ETF also of course focuses on tax-exempt bond offerings, offering tax protection for those investors who need it. Puerto Rico government bonds also have the special status of being “triple tax exempt,” exempt from federal, state, and local taxes.
ZTAX actively invests in U.S. dollar-denominated government debt in those three territories of any maturity, duration, or credit rating. ZTAX considers non-investment grade fixed income securities to be rated lower than BBB- by S&P. The Puerto Rico Muni ETF charges a 110 basis point fee for its approach. Per VettaFi’s head of ETF research, Todd Rosenbluth, the strategy presents an alternative to others that also hold Puerto Rico munis.
“Some other high yield municipal bond ETFs have exposure to bonds issued in Puerto Rico,” Rosenbluth said. “However, they also have exposure California, Illinois and New York exposure. Advisors that want more targeted exposure might find the ETF appealing.”
Looking Ahead in Puerto Rico Munis
ZTAX’s managers identify muni investments based on the issuer’s legal and economic fundamentals, according to the ETF’s prospectus. ZTAX looks to quality revenues, liquidity, and more based on the macroeconomic environment of each issuer.
For those investors looking out for a new muni look, a Puerto Rico muni ETF like ZTAX could be an intriguing offering. ZTAX arrives to a complicated market environment in which tax exempt offerings could be a potent source of ballast.
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