Weakness in X-Square Municipal Income Tax Free ETF's Process and People Pillar ratings limits this strategy to a Morningstar Medalist Rating of Negative. Fees are a weakness here. The strategy's lofty fees are a high hurdle to clear, as it is priced within the highest quintile among peers.  

 The strategy earns a Low Process Pillar rating. The strategy suffers from its inexperienced portfolio management team. This largely drives the strategy's Below Average People Pillar rating. The strategy's parent organization still has a way to go to reach the industry standard, evidenced by unattractive fees and relatively short-tenured portfolio managers. As a result, the firm obtains a Below Average Parent Pillar rating.

Analyst Rating

Morningstar's style-agnostic investment process evaluation looks for strategies that should be able to outperform their Morningstar Category index on a risk-adjusted basis over time. X-Square Municipal Income Tax Free ETF earns a Low Process Pillar rating.    The most significant detractor from the rating is high costs across its parent firm's funds, whose fees rank in their category's costliest quintile on average. While this fund's costs are most relevant to investors, the pattern at the broader firm suggests it could do more to keep expenses low. Management team experience, which averages four years at this fund, also detracts from the process. A high expense ratio detracts from the rating further, with fees ranking in its category's most expensive quintile. Fees detract from net returns, giving this process a significant hurdle to overcome.

 The investment strategy as stated in the fund's prospectus is as follows: 


The investment seeks to provide income exempt from federal income tax.  Under normal market conditions, the fund invests at least 80% of its assets (defined as net assets plus any borrowing for investment purposes, if any) in tax-exempt municipal securities, the income from which is exempt from both federal and state income tax. The adviser expects to invest up to 100% of its assets in tax-exempt municipal securities issued by Puerto Rico, Guam and the U.S. Virgin Islands. Municipal securities may be of any maturity, and duration or credit rating including those rated below investment grade (commonly known as “junk bonds”). The fund is non-diversified.

Process

X-Square Municipal Income Tax Free ETF earns a Below Average People Pillar rating. The team is strengthened by the firm's five-year retention rate of 100%. However, the rating is limited by the experience of the management team, which averages four years at this fund. A high expense ratio, with fees ranking in its category's most expensive fifth, also detracts from the team. Fees lower net returns, giving this team a considerable hurdle to overcome.


The team is guided by the longest-tenured manager Ignacio Canto, who provides four years of listed portfolio experience. The average Morningstar Rating of the strategies they currently manage is 3.3 stars, demonstrating encouraging risk-adjusted performance. At least one member of the team has invested $1 million or more of their own capital in the fund, which helps align their interests with the strategy's investors.

Below Average

People

Xsquare Capital lags peer asset managers in a number of stewardship qualities, resulting in a Below Average Parent Pillar rating. Xsquare Capital open-end and exchange-traded products are costlier than similarly distributed funds at other highly-rated asset managers, on average in the most expensive quintile of category peers. The higher expense profile contributes negatively to the firm's overall stewardship rating and creates a larger performance hurdle. A cause for concern at Xsquare Capital is its relatively inexperienced longest-tenured management. In particular, average asset-weighted tenure at the firm is only four years, a negative contributor to the rating. The firm's lineup has had encouraging initial results. Its three-year risk-adjusted success ratio is 67%, meaning that of the funds with a three-year track record, 67% have survived and beaten their respective category median on a risk-adjusted basis.

Parent

X-Square Municipal Income Tax Free ETF

ZTAX is an actively managed fund that invests in USD-denominated municipal securities that are exempt from US federal, state, and local taxes. Securities could be of any maturity or credit quality issued by Puerto Rico, Guam and the US Virgin Islands.

While the ETF industry has grown significantly in recent years, there are still “firsts” to be had. X-Square Capital can now lay claim to one of them, launching the very first Puerto Rico Muni ETF.

News for X-Square Municipal Income Tax Free ETF ETF (ZTAX)