It's been said that two certainties in life are death and taxes.
Here's a new ETF that might let you bypass the latter.
But first, some context. The $4 trillion municipal bond market, according to the Securities Information and Financial Markets Association, has seen issuance of over $137 billion and trading of over $12 billion year-to-date through May. This is a sizable market, but one that used to be known as a proving ground for new brokers playing "dialing for dollars," as they sought to ease potential new clients into investing by buying securities they could relate to, and in some cases see some kind of financial return on their local tax dollars.
Municipal bond-focused products are often found in the form of mutual funds, or closed-end funds, but there are currently 78 municipal bond focused exchange-traded funds for a total of just $107 billion in assets under management with the largest two funds, from Vanguard ($33 billion) and iShares ($27 billion) accounting for just under 60% of those assets.
At the very bottom of those assets under management-ranked list is ... X-Square Municipal Income Tax-Free ETF.
I Triple-Dog Dare You
Municipal bonds are known for being tax-free at the federal, state, and local level if investors purchase bonds within their own state, except for Illinois, Iowa, Wisconsin, Nebraska, and Oklahoma. Live in Ohio and buy California-issued municipal bonds? That local- and state-level tax exemption goes away, making out-of-state or national muni funds less attractive to some investors. Through the magic of federal law, taxation of interest from municipal bonds issued by any U.S. territory is not allowed. This means that regardless of what state you live in bonds from Puerto Rico, Guam, and the U.S. Virgin Islands are triple tax-free. Fund issuers recognize this and oftentimes will allocate a portion of the portfolio to bonds from these jurisdictions. X-Squared Capital has taken this a step further and created a fund that invests solely in bonds from U.S. territories. These bonds, while from U.S. territories are essentially the same types of bonds we see here on the mainland, financing power and water infrastructure projects, housing, and education.
Of the three issuers, Puerto Rico is the largest, and in fact, per the Municipal Securities Rulemaking Board's (MSRB) 2022 Factbook, bonds from Puerto Rico figure in the list of top 50 most active bonds by the number of trades for both fixed and variable rate bonds and also for short- and long-term bonds as well. Although not as prominent, these bonds also make appearances in the top 50 list of bonds by par amount or outstanding deal size in dollars.
Wrap It Up
The fund has a 110-basis point expense ratio, so $1,000 invested over a calendar year would see $11 go toward fees. ZTAX doesn't look to deliver any particular maturity, duration, or credit quality target for investors as described in the issuer's fact sheet, but if you are looking for completely tax-free income, ZTAX is worth taking a closer look at.