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Examining Your Fund’s Puerto Rico Exposure

ETFtrends.com

Greece or Puerto Rico. Investors have their pick of default poison, but investors in fixed income exchange traded and mutual funds would do well to monitor goings on in Puerto Rico because the U.S. territory’s imminent default could affect some well-known municipal bond funds.

So dire is the situation in Puerto Rico, Gov. Alejandro García Padilla told the New York Times over the weekend that government finances there are “in a death spiral.” And $72 billion is not chump change. To put $72 billion into context with a catchy anecdote, that is more than twice the market capitalization of General Mills (GIS).

Puerto Rico’s debt woes are important to fund investors because an “estimated in 2013 that as much of 80% of Puerto Rico’s debt has found its way into muni-bond funds, and 180 mutual funds in the United States and elsewhere have at least 5% of their portfolios in Puerto Rican bonds,” Alan Gomez reports for USA Today, citing Morningstar data.

“Last week, the general obligation (GO) debt had plumbed new depths helping to record a negative 5% month-to-date return for the S&P Municipal Bond Puerto Rico General Obligation Index. According to JR Rieger, global head of fixed income for S&P Dow Jones Indices, the facts are the situation isn’t looking good: the pending Puerto Rico Electric Power Authority July 1st default looms on the market, the possible restructuring of the Government Development Bank debt and the possible postponement of G.O. set – asides have sent alarms to G.O. bond holders,” said S&P Capital IQ in a new research note.

The $1.6 billion Market Vectors High Yield Municipal Index ETF (HYD) lost 1.4% Monday . That ETF has a Puerto Rico weight of just 3.2%, making the territory the fund’s tenth-largest geographic weight. The $396.8 million SPDR Nuveen S&P High Yield Municipal Bond ETF (HYMB) lost just 0.8% yesterday despite a Puerto Rico weight of over 13%, making the territory HYMB’s largest geographic weight. [Muni Bond ETFs Endure Puerto Rico Default]

The shorter duration Market Vectors Short High-Yield Municipal Index ETF (SHYD) was unchanged Monday even with a 4.5% weight Puerto Rican munis. Some actively managed mutual funds have significantly larger Puerto Rico exposure than ETF rivals.

“Oppenheimer Rochester Fund Municipals (RMUNX), an actively managed mutual fund has 77% of its assets in NY state bonds, but most of the rest of the assets is in Puerto Rico bonds. Similarly Oppenheimer Rochester New Jersey Municipal Fund (ONJAX) has 29% of assets in bonds issued by Puerto Rico, despite what some New Jersey residents might expect,” according to S&P Capital IQ.

SPDR Nuveen S&P High Yield Municipal Bond ETF

hymb

Tom Lydon’s clients own shares of HYD.