With the federal government’s backing, the new “Build America” bond-related exchange traded fund (ETF) may be the right kind of investment for the risk-averse investor.
Invesco PowerShares‘s ETF, PowerShares Build America Bonds Portfolio Fund (NYSEArca: BAB), will be the first to invest in taxable municipal bonds issued by the government’s American Recovery and Reinvestment Act of 2009. BAB will have a net expense ratio 0.28%. (PowerShares’s Build America ETF).
The Act will establish a Direct Payment Bond, which BAB will invest in. The federal government will give the bond issuer a direct payment of 35% of the interest rate on the bond, allowing municipalities to compete with the corporate bond markets. The bonds could entice nontaxable investors like pension plans and attract investors who are looking for corporate bond-style interest rates without the risk of defaults, writes Cinthia Murphy for IndexUniverse. (Why are muni bonds appealing?)
BAB will seek to reflect the BofA Merrill Lynch Build America Bond Index, which includes investment-grade bonds with a minimum one-year remaining term to maturity, fixed coupon schedule and a direct pay federal subsidy. BAB uses an optimization strategy that holds a sample of the index’s 1,800 issues.
Ben Fulton, executive vice president of global product development with Invesco PowerShares, believes BAB will be attractive because municipalities are looking for capital to invest in the country’s vast infrastructure projects.