Van Eck Associates Corp. (“Van Eck”) has filed a registration statement with the Securities and Exchange Commission for an exchange traded fund (“ETF”) that will seek to replicate an index that focuses on Puerto Rico municipal bonds. New York-based Van Eck registered the Market Vectors Puerto Rico Municipal Index ETF with the SEC and said the fund is set to launch in late 2013 or 2014.
According to the SEC filing, the ETF seeks to mirror the Barclays Custom Puerto Rico Municipal Composite Index. The Puerto Rico municipal bond index tracks municipal bonds from the Commonwealth of Puerto Rico, as well as a smaller quantity of debt from other U.S. territories – Guam, the Virgin Islands, American Samoa and the Northern Mariana Islands. InvestmentNews claims it will be the first EFT to focus on Puerto Rico and other U.S. territories.
According to InvestmentNews, approximately 77% of U.S. municipal bond funds contain Puerto Rico municipal bonds. Puerto Rico debt is attractive to municipal bond fund managers because of its tax-free status. Puerto Rico municipal bonds are exempt from federal, state, and local taxes, regardless of the state in which the bond holder resides.
MarketWatch states that the value of the Puerto Rico municipal bond market has dropped around 17% in 2013 – more than 6 times the losses sustained by other municipal bonds in the $3.7 trillion municipal bond market during the same period.
Jim Colby, a senior municipal strategist at Van Eck who will co-manage the new Market Vectors Puerto Rico Municipal Index ETF told InvestmentNews that the ETF is intended to remove the risk associated with buying individual securities and to provide an aspect of liquidity.
Van Eck’s Puerto Rico municipal bond ETF will invest at least 80% of its assets in tax-free municipal bonds issued by the governments of Puerto Rico, Guam, the U.S. Virgin Islands, American Samoa, and the Northern Mariana Islands according to the Registration Statement filed with the SEC. Of that 80%, a majority would be debt from Puerto Rico.
InvestmentNews states that the existing ETF with the largest exposure to Puerto Rico debt is the PowerShares Insured New York Municipal Bond Portfolio which has 15%.
To read more about Puerto Rico municipal bonds, click here.