Advisors who have invested clients’ funds in municipal bond funds or ETFs need to check if those investment vehicles own Puerto Rico government bonds, which are now trading around 64 cents on the dollar. Investors may have exposure to those bonds without even knowing it.
Oppenheimer Rochester New Jersey Municipal Fund (ONJAX) has close to 30% of its assets invested in Puerto Rico debt and the company’s Fund Municipals (RMUNX), a New York state muni bond fund, has roughly the same percentage of Puerto Rico bonds.
“The most important thing an advisor or investor can do is look inside their portfolio,” says Todd Rosenbluth, director of ETF and mutual fund research at S&P Capital IQ.
The two Oppenheimer Rochester funds mentioned above are investment-grade funds, which are less likely to hold Puerto Rico bonds than high-yield bond funds. Among high-yield muni funds or ETF, “There’s a good chance they have exposure to Puerto Rico,” says Rosenbluth.
Market Vectors High Yield Municipal Index ETF (HYD) has a 3.2% exposure to Puerto Rico debt; Market Vectors Short High-Yield Municipal Index ETF (SHYD) has a 4.5% weighting, and SPDR Nuveen S&P High Yield Municipal Bond ETF (HYMB) a 14% weighting, according to Rosenbluth.
Many muni bond funds and ETFs hold Puerto Rico debt because they have relatively high yields and because they are triple exempt. The interest they pay is not subject to federal, state or local taxes. But these bonds have become a very risky investment because the finances of Puerto Rico have become very problematic.