Canto to Showcase Triple Tax Exempt Muni at Exchange

Evan Harp: Thank you so much for joining me. Can you tell us a little bit about your firm, X-Square Capital?

Ignacio Canto: X-Square Capital is an asset manager based out of San Juan, Puerto Rico. We manage various private funds, including public funds, the X-Square Balanced Fund, and ZTAX, the X-Square Municipal Income Tax-free Fund, which trades in the New York Stock Exchange.

Evan Harp: What are the biggest challenges facing investors right now?

Ignacio Canto: Uncertainty. There’s certainly lots of uncertainty that has been added to the macro environment by this new Trump administration as they readjust the trade flows globally. It’s an immense task that they want to do, apparently, very quickly. It’s going to be very messy and very uncertain until they find trade agreements that are satisfactory for them.

Evan Harp: Can you tell us a little bit about the ZTAX ETF?

Ignacio Canto: ZTAX is the only triple tax exempt ETF in the market right now. That is exempt from local income tax, from state municipal income tax, and from federal taxes as well. It encompasses the whole landscape of triple tax exempt municipal bonds, which come from the U.S. territories. That is Guam, the U.S. Virgin Islands, and Puerto Rico.

Puerto Rico has been going through a very difficult bankruptcy process for the last almost 10 years. We took all the restructured credits, the ones that have gone satisfactorily through the bankruptcy process and have been reissued. That’s what we have fitted into the ETF. So, only restructured credits. Then we added the super-securitization structure from the U.S. Virgin Islands, which was done as a consequence of the territories being capable of filing for bankruptcy. So they had to incredibly enhance their credit to be able to get market access. Then we also tacked on a little bit of Guam municipal securities. 

It’s more or less about somewhere between 80 and 90 post-restructured bonds from the Puerto Rico bankruptcy. Then we added those other very high yield tax exempt bonds which have a strong credit quality from Guam and the Virgin Islands. 

Planning all of this out, we took our playbook from the Greek bankruptcy. Anyone that has been following that since 2011, they might have noticed that Greek bonds were the best performing bonds throughout the entire decade. We think the same thing is going to happen with Puerto Rican bonds. We have an extremely high level of conviction that Puerto Rican bonds, triple tax exempt municipal securities, will be the best performing bonds across the entire municipal complex sector during the next 10 years. Investors are very much under-invested in that sector.

It trades over the counter. It’s not transparent. It’s relatively difficult to achieve any sort of diversity amongst those credits because of the way they trade. So we opted to simplify this into the most efficient and simple structure, which is an ETF. That’s why we came up with a ZTAX ETF.

Evan Harp: That makes a lot of sense. Can you talk more about how ZTAX could be a good ETF for this specific uncertain moment?

Ignacio Canto: Absolutely. I think we’re exiting a significant bear market in the bond market. Basically, there was a huge spike in inflation as a result of the money printing, the fiscal excess, and the supply chain issues  emanating from the COVID pandemic. Now, we’re obviously coming out of that. I think we will continue to see an improvement in the bond market as the government right sizes fiscal spending, as supply chains normalize, and certainly as more money goes into the bond market once it stabilizes. People are hungry for that, and once treasury bills lose competitiveness relative to the long end of the curve, which is starting to happen, people will start going for higher yield and a more efficient yield — which is the triple tax exempt. It’s the best and most efficient yield out there.

ZTAX yields about 4.70%. Triple tax exempt, that’s a pre-tax yield of about 6% with minimum volatility. These are credits, again, that have been de-levered dramatically. Puerto Rico has only a 35% debt to GDP ratio right now. That compares favorably to the US, which is at about 100%. And most states and jurisdictions range from 60% up to 90% in debt to GDP of each single state and issuer. So, Puerto Rico fits the perfect trade right now of an unrated, recently exit out of bankruptcy credit, to grab and ride as it restores its credit rating credibility.

Evan Harp: This all makes a lot of sense. We’re looking forward to having you at the Exchange conference. Can you talk a little bit about the value of in-person events and professional conferences?

Ignacio Canto: Certainly! Our idea joining Exchange is to have this type of conversation that we’re having right now, in person, with all these advisors that don’t know about ZTAX. They don’t even know it exists yet. We have only been in the market about a year and a half. This is our first marketing event.

We want to touch upon all these strong points about our ETF. We want to show them the comparables. You take the biggest municipal bond ETFs and look at how they compare to ours. We want to show all that in person, and answer all the questions that they have. We look forward to being of use in modeling their portfolios and enhancing their yield on other muni portfolios and fixed income portfolios. 

We’re excited to have these one-on-one conversations with all the advisors, all the providers, all the portfolio and the ETF managers out there. Feel free to stop by our booth. The whole team is gonna be there. We’ve been trading these credits for almost 20 years now, including having a hedge fund through the bankruptcy process, so we are very much acquainted with the credit and we plan on being of use. I encourage all readers to take advantage of that proposition, because it’s a lot of value that we have to offer with this ZTAX ETF.

You can register for Exchange here.

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