Daily ETF Watch: Puerto Rico Muni Fund

Recently, a second firm filed for a municipal bond ETF targeting Puerto Rico. The U.S. territory was removed from some bond indexes early last year after a credit downgrade caused by its high debt load; however, investors looking to invest in its muni bonds could gain some exposure through high-yield municipal bond ETFs.

It’s a high-risk market, so much so that an article from Bloomberg back in September noted that although Puerto Rico’s municipal bonds beat the broad municipal bond market year-to-date in terms of raw performance data, the securities’ high volatility caused the risk-adjusted returns to actually trail other muni bonds.

But where there’s high risk, there is often investment opportunity, so it’s not exactly surprising that a few firms are sizing up Puerto Rico munis for an ETF. Van Eck filed for its fund back in 2013, before the downgrade, though there was no doubt quite a bit of uncertainty building about the territory’s financial health even then. And in the last couple weeks, Exchange Traded Concepts filed for an ETF that will track the S&P Municipal Bond Puerto Rico Index.

The EVE/S&P Municipal Bond Puerto Rico ETF will be tied to an index of more than 700 issues of all credit qualities. The fund’s prospectus specifically notes that “As of the date of this prospectus, a significant portion of the bonds on the Underlying Index were rated below investment grade.”

It should also be noted that Puerto Rico’s muni bond market is relatively small compared with those of New York and California. S&P’s New York and California muni bond index have market capitalizations of $215 and nearly $240 billion, respectively, while Puerto Rico’s index weighs in with a market cap of less than $40 billion. Nonetheless, that’s higher than the market cap of a lot of the U.S. states.

The fund is sponsored by Stamford, Connecticut-based EVE Capital, which is likely using Exchange Traded Concepts’ exemptive relief to launch its fund idea.

The filing did not include any expense ratios or tickers, nor did it mention an exchange listing.