First Puerto Rico ETF Planned by Van Eck Amid Market Flux

Van Eck Associates Corp. is moving ahead with an exchange-traded fund focused on Puerto Rico and other U.S. territories, the first of its kind, even amid the biggest losses for the island’s securities since at least 1999.

The New York-based company registered the Market Vectors Puerto Rico Municipal Index ETF with the U.S. Securities and Exchange Commission in August, regulatory filings show. Jim Colby, a senior municipal strategist at Van Eck who would co-manage the fund, said it may debut this year or in 2014, depending on feedback from the SEC.

“A product like this takes away the individual security risk and adds an element of liquidity,” Colby said in an interview. “In this circumstance with this particular product, my guess is we will have a little bit of pushback” given its unique nature, he said.

John Nester, an SEC spokesman in Washington, declined to comment on the filing.

Even after a rebound this week, Puerto Rico securities have still lost about 19 percent this year through Oct. 17, the worst performance since at least 1999 and more than six times the drop in the $3.7 trillion market, Standard & Poor’s index data show.

The island’s bonds have rallied since commonwealth officials gave a webcast briefing for investors on Oct. 15 in which they said the territory has sufficient funding to avoid borrowing before June 30. S&P’s Puerto Rico index jumped 2.1 percent yesterday, the biggest one-day increase since December 2008.

Lead Position

Though 77 percent of muni mutual funds hold bonds from the commonwealth, Van Eck’s ETF would be the first of its kind to focus primarily on Puerto Rico, according to Morningstar Inc. (MORN) Puerto Rico borrowings are tax-exempt in all states.

While ETFs are similar to mutual funds that track an index of equities, bonds or commodities, they can be bought and sold throughout the trading day.

The ETF would replicate Barclays Plc’s Custom Puerto Rico Municipal Composite Index by investing at least 80 percent of assets in tax-free debt sold within Puerto Rico, Guam, the Virgin Islands, American Samoa and the Northern Mariana Islands, the SEC filing said. A “substantial percentage” of assets would be from Puerto Rico.

The PowerShares Insured New York Municipal Bond Portfolio (PZT) has the highest exposure to Puerto Rico of any ETF, at 15 percent, said Michael Rawson, an ETF analyst at Morningstar.

In the SEC filing, the company cited 19 risks of investing in the fund, including that “several key economic indicators have begun to indicate a significant slowing of economic activity” in Puerto Rico.

A Puerto Rico Government Development Bank index measuring the self-governing commonwealth’s economic activity fell 5.4 percent in August from a year earlier, the most since 2010.

To contact the reporter on this story: Brian Chappatta in New York at bchappatta1@bloomberg.net

To contact the editor responsible for this story: Stephen Merelman at smerelman@bloomberg.net

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