Guaynabo, Puerto Rico-based X-Square Capital plans to launch an exchange-traded fund of primarily Puerto Rico restructured municipal bonds Friday.
The X-Square Municipal Tax Income Free ETF will be the first Puerto Rico ETF and the first triple-tax exempt ETF in U.S. history.
The fund will have 80% of its holdings in Puerto Rico bonds and 20% in
The X-Square Municipal Tax Income Free ETF will trade under ZTAX on the New York Stock Exchange, said Ignacio Canto, president of the X-Square Capital.
Potential investors have told Canto they want exposure to Puerto Rico as the economy improves and they want the greater liquidity and potential marginality that an ETF can provide.
Canto said institutional investor and big retail investors from both Puerto Rico and the 50 states have expressed interest in investing in the fund.
Initially for Puerto Rico bonds, the fund will mainly hold Puerto Rico general obligation and
There will be no Puerto Rico Electric Power Authority bonds as parties are
"So long as it's not a way to cajole retail investors back into Puerto Rico exposure, it could be a good idea," said Matt Fabian, partner at Municipal Market Analytics.
"Puerto Rico is an extremely interesting debt market to speculate on, with lots of potential volatility in either direction for dozens of reasons, including hypothetical restoration of ratings or another financial and economic collapse," Fabian said. "Both are reasonable outcomes in the next five or 10 years."
"Compared to the largest fixed income ETFs, the new Puerto Rico vehicle has an exceptionally high expense ratio (0.65% vs. 0.15%) but the yield will be higher than most given the underlying securities have high coupons and are unrated," said Cate Long, principal and Puerto Rico Clearinghouse.
"We think this is a great initiative and is another sign of the creativity of professionals on the island," said Omar Marrero, executive director of the Puerto Rico Fiscal Agency and Financial Advisory. "This type of product is another tool that should improve liquidity for Puerto Rico bonds."
The fund is X-Square's fourth product. Among other things it had a Cayman-Islands based hedge fund owning Puerto Rico bonds, which it unwound in December 2021. It has been developing this tax-exempt fund for 20 months.
Since being introduced in mid-March 2022, Puerto Rico's Series 2022A general obligation bond maturing 2046 started trading around 98 cents on the dollar, reached a low of 71.5 cents in November, and is now trading around 81 cents, according to data from IHS Markit.
