VanEck Vectors ETFs
It is difficult, I believe, to imagine that there is an investor who has no opinion on recent events affecting the Commonwealth of Puerto Rico. The actions recently taken by the three leading bond rating agencies to move the ratings of certain Puerto Rico issues to below investment grade have created a firestorm of commentary and angst over the possibility that Puerto Rico, the ninth largest issuer of tax-exempt municipal bonds, might default on its payment obligations.
Source: VanEck Research using data compiled by Bloomberg. As of February 13, 2014.
As has been thoroughly reported, a good number of municipal bond mutual funds and ETFs across the country have (or had) exposure to many of the Commonwealth's issues of triple tax-exempt bonds (federal, state, and local levels of taxation), going into this current crisis1. Selling by wealth managers began in earnest last summer and only exacerbated the downward spiral of valuations, putting greater pressure on the island to seek to maintain a foothold in the capital markets. Significantly, S&P has mandated, as a condition of Puerto Rico's avoiding further erosion of its BB+ credit rating, that it raise capital in the bond markets, which it plans to do in the next few weeks.
Despite all of this, I offer these observations: since Moody's joined S&P to drop the credit of Puerto Rico to below investment grade, there has been no diminution in the trading of its bonds. Yes, there have been sellers, but there have also been buyers. Several dealers have reported daily trade activity in the hundreds, representing $20 million to $30 million in nominal value. It has also been reported that certain very large and opportunistic money managers are building large positions in Puerto Rico bonds, which may provide the liquidity the market needs. This may be suggestive of an oversold market, and a chance, perhaps, to position accordingly, given some expectations for recovery. Whatever the outcome, it remains important to note that below investment-grade ratings do not mean imminent default. We should consider these factors as important markers in this evolving narrative.
1Source: Bloomberg Brief Newsletter. As of February 10, 2014. "Puerto Rico Cut Means Realignment for Indexes."
The VanEck Vectors High-Yield, Short High-Yield, Long, Intermediate, and Short Municipal Index ETFs invest assets in municipal bonds issued by Puerto Rico. (Click the preceding hyperlinks to view current geographic weightings.) This means the Funds are susceptible to additional risks, including economic, political, regulatory or other factors adversely affecting issuers in Puerto Rico. Recent downgrades affecting these bonds may exacerbate Puerto Rico's current financial difficulties and the liquidity and risk profile of its outstanding bonds, which may affect these Funds.
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All indices listed are unmanaged indices and do not reflect the payment of transaction costs, advisory fees or expenses that are associated with an investment in a fund. An index’s performance is not illustrative of a fund’s performance. Indices are not securities in which investments can be made.
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Municipal bonds are subject to risks related to litigation, legislation, political change, conditions in underlying sectors or in local business communities and economies, bankruptcy or other changes in the issuer’s financial condition, and/or the discontinuance of taxes supporting the project or assets or the inability to collect revenues for the project or from the assets. Bonds and bond funds will decrease in value as interest rates rise. Additional risks include credit, interest rate, call, reinvestment, tax, market and lease obligation risk. High-yield municipal bonds are subject to greater risk of loss of income and principal than higher-rated securities, and are likely to be more sensitive to adverse economic changes or individual municipal developments than those of higher-rated securities. Municipal bonds may be less liquid than taxable bonds.
The income generated from some types of municipal bonds may be subject to state and local taxes as well as to federal taxes on capital gains and may also be subject to alternative minimum tax.
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