In the past month, both Moody’s and S&P downgraded Puerto Rico’s general obligation debt to below investment grade. As my colleague Peter Hayes indicated in a recent Blog post , Puerto Rico debt has been trading as non-investment grade since last summer, and the new ratings really reflect current pricing and trading.

As with any noteworthy downgrade, the news sparked a couple of inquiries from iShares investors. Does my muni fund hold Puerto Rico debt? If so, how much? What is the impact to the fund? Fortunately, the answer to these questions is simple:

None of the municipal bond iShares funds, including the iShares National AMT-Free Muni Bond ETF (MUB), hold any Puerto Rico debt as of January 31, 2013. MUB and some of the Muni Series funds did hold some Puerto Rico debt previously, but S&P had announced back in December that they would be removing Puerto Rico and other territories from their National indices as of Jan 31. We sold the Puerto Rico bonds we had been holding in accordance with the index change.

This news of the downgrade only sparked a couple of inquiries because most investors knew how to get the answer as we put the holdings of all of our funds up on our website every day.

Anyone can go online and see exactly what bonds each fund holds and how much. And in today’s market, this is exactly the kind of transparency that many investors are looking for.  According to Morningstar almost 70% of municipal bonds mutual funds hold Puerto Rico bonds as of February 6, 2014.

So why do so many funds hold Puerto Rico debt?  The reason is that they enjoy a unique tax advantage. Most municipal debt is exempt from Federal taxes, along with state taxes if you are filing in the same state as the issuer. If you buy your local muni bond then it will even be exempt from local taxes. For this reason investors in high tax states, like California or New York, tend to prefer bonds from their state.

What is unique about Puerto Rico debt is that every US investor enjoys the triple tax exemption, regardless of where they live. So if I am a California investor then from a tax perspective I prefer California bonds, as well as those from Puerto Rico. And if I am a New York investor I prefer New York bonds, as well as those from Puerto Rico.

As a result, most municipal bond funds own Puerto Rico debt. This includes national funds, where you would generally expect a multitude of issuers, as well as state funds. This second fact is often more of a surprise for investors. Imagine that you live in New York and buy a New York state muni fund.