Taking advantage of the tax-free nature of the Puerto Rico’s municipal bonds, many mutual funds, as well as, exchange-traded funds (or ETFs) have major holdings in its debt.
The chart above shows the dip in PZT, PWZ, and HYD prices on Feb 4, 2014, when S&P downgraded Puerto Rican debt to junk level.
Among the top mutual funds, the Franklin Double Tax-Free Income has about 60% of its portfolio invested in Puerto Rico bonds, while the Oppenheimer Rochester VA Municipal and the Oppenheimer Rochester NC Municipal also have weightings of greater than 30%.
Among the ETFs, 23 ETFs have exposure to the island’s debt, but only four of those have holdings of 5% or more, a much smaller figure compared with the 180 mutual funds with holdings of at least 5%. The PowerShares Insured New York Municipal Bond ETF (PZT) and the PowerShares Insured California Municipal Bond ETF (PWZ) have the largest holdings at 17% and 14%, respectively.
When choosing between the two, ETFs usually turn out to be less expensive than mutual funds on account of the expense ratios. For example, the PZT and PWZ have expense ratios of just 0.28%, less than half that of FPRTX’s 0.66% expense ratio.
Another popular ETF with Puerto Rico holdings is Van Eck’s VanEck Vectors Puerto Rico Municipal Index ETF (HYD). As of March 7, 2014, Puerto Rican debt comprised 7.91% of the ETF’s portfolio.
HYD tracks the Barclays Municipal Custom High Yield Composite Index (LMEHTR), which tracks the high-yield municipal bond market with a 75% weight in non-investment grade municipal bonds and a 25% weight in Baa/BBB-rated investment grade municipal bonds for liquidity and balance. The fund has an expense ratio of 0.35% and provides yields in the range of 5.75% to 6.25%.
Among the top ten companies which hold Puerto Rico bonds in their investment portfolio, OppenheimerFunds, Inc. tops the list with about$4.6 billion worth of holding, followed by Franklin Resources Inc. (BEN) with $3.4 billion, and Nuveen Asset Management, LLC with about $1 billion. BNY Mellon, AllianceBernstein Holding LP (AB), and Vanguard Group, Inc. are next in the list. Legg Mason, Inc. (LM), Goldman Sachs Group, Inc. (GS), Lord Abbett & Co., and Wells Fargo & Company (WFC) complete the list.
To know the respective holdings of these companies in Puerto Rico bonds, and to learn about the new GO bonds being issued by Puerto Rico to the tune of $3 billion, the largest tax-exempt deal ever, continue to the next part of this series.