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.

The Build America Bond program is slated to mature at the end of 2010, Fulton notes, but there’s been discussion about the possibility of extending it. The prospectus is written to reflect the impact any potential changes to the program may have on the fund, whether it’s expanded or ended. Fulton says that nearly $50 billion in Build America Bonds has been issued to date, and estimates are it could reach close to $100 billion by the end of next year.

“BAB bonds have a life of their own. First they were viewed as tools for the government’s stimulus plan only. Now they are also marketed as a fixed income investment focused on rebuilding USA’s aging infrastructure. We believe this is a product that will appeal to the masses compared to only the highest tax bracket focus of tax free municipal ETFs,” Fulton says.

For more information on municipal bonds, visit our municipal bonds category.

Max Chen contributed to this article.

Municipal bond mutual funds increased 14.4% on average through Oct. 29 and yields have not experienced their current lows in more than four decades, reports Jonathan Burton for The Wall Street Journal. The surge in muni bonds may be over, but some believe this investment vehicle still have a place in many portfolios, especially as tax time looms. (The current bond hot spots).

Many states face deep budget deficits, potential downgrade risk and headline risk. Bonds usually drop in price when credit ratings are bad or when budget deficits are high.

Still, muni bonds appeal to investors because of of their tax-free income status. Munis are generally exempt from federal and state level taxes. Their tax-free status will become more appealing as federal income taxes become higher as the Bush administration’s tax cuts expire at the end of 2010.

Currently, the supply/demand imbalance is supporting the price of municipal bonds. Professionals suggest potential investors stick to bonds with at least a single-A rating. They also note that long-term bonds are more susceptible to interest rate changes and don’t provide enough to compensate. (What you need to know about bond ETFs).

For more information on municipal bonds, visit our municipal bond category.

• PowerShares Insured National Muni Bond (NYSEArca: PZA): up 16.3% year-to-date; yields 4.5%

• iShares S&P National Municipal Bond (NYSEArca: MUB): up 5.9% year-to-date; yields 3.6%

• SPDR Barclays Capital Municipal Bond (NYSEArca: TFI): up 8.1% year-to-date; yields 3.68%

• Market Vectors Long Municipal (NYSEArca: MLN): up 20.4% year-to-date; yields 4.49%

Max Chen contributed to this article.

iShares

iShares’ proposed line of new funds will hold muni bonds, and the funds themselves would target certain maturity dates.

Each fund would hold the underlying securities from its respective index to full maturity, at which point the fund would simply retain a cash position, according to Index Universe staff. After the last holding of the fund hits maturity, which is on or around Aug. 31 of the year in the fund’s name, the assets would be distributed to shareholders.

The funds would track indexes in the recently launched S&P AMT-Free Municipal Bond Index Series, which track investment-grade muni bonds that mature between June 1 and Aug. 31 of a specific year. (Bond ETF hot spots).

These are the first ETFs that would have maturities fall within a specific date range. They act almost like muni bonds, in that they make tax-exempt distributions and return an entire investment on a specific date. (What you need to know about bond ETFs).

For more stories about bond ETFs, visit our bond ETF category.

As a rule of thumb, bonds and ETFs that track them invest in stocks that can be hard to trade. As investors continue to seek returns within the fixed income market, especially with ETFs, the indexes upon which the funds are based are becoming compromised, reports Randall W. Forsyth for Barron’s. (Why high-yield bonds are in favor).

A case in point is the rapid expansion of the iShares iBoxx $ Investment Grade Corporate Bond Fund (NYSEArca: LQD). LQD rose to $13.3 billion in assets to become the ninth-largest ETF in the United States. iShares found itself in a position in which it had to accommodate the new growth and broaden the criteria for bonds that are eligible to be included in LQD.

The vast majority of corporate and municipal bonds do not necessarily trade every day, Forsyth points out, including the issues included in the indexes upon which ETFs are based.

That said, bond ETFs are still enormously popular. They’ve gotten more than half of the new cash flowing into ETFs, reports Eleanor Laise for The Wall Street Journal. Bond ETF providers are aware of the challenges in building bond ETFs, and strive to build them so that their ETFs work optimally. (Why bonds are so popular).

For more stories about municipal bonds, visit our municipal bond category.

For full disclosure, Tom Lydon’s clients own shares of LQD.

Grail Advisors

The two ETFs would be sub advised by McDonnell Investment Management LLC. David Hoffman for Investment News reports that the new ETFs are:

• Grail McDonnell Intermediate Muni Bond ETF
• Grail McDonnell Core Taxable Bond ETF

This filing comes on the heels of Grail’s launch of four active equity ETFs:

• RP Growth (NYSEArca: RPX)
  
• RP Focused Large Cap Growth (NYSEArca: RWG)
• RP Technology (NYSEArca: RPQ)
• RP Financials (NYSEArca: RFF)

Read our interview from earlier this year with Grail’s CEO William Thomas here.

Currently, Grail offers five actively managed ETFs.

For more stories about new ETFs, visit our new ETF category.

Individuals are living longer, health care costs are increasing and social security benefits are dwindling, forcing many  retirees to require more growth in their portfolios during the coming years and decades.  In order to achieve this, Katy Marquardt of US News & World Report suggests the following rules to followL

• Separate retirement money into different categories.  Three categories to consider are short-term funds, which reside in very low-risk investments, such as high-quality bonds; intermediate-term money goes in a balanced mix of stocks and bonds, such as a 50-50 or 60-40 split; and long-term investments starting with five-year time horizons are heavier on stocks.

• Don’t look too far for yield, because decent yields can be tough to locate. Treasuries are the safest, but they yield little. If you want a bigger yield, you’ll have to take on some risk

• Consider municipal bonds.  They have excellent tax benefits (they’re exempt from federal taxes and in some cases are exempt from state and local taxes). Choose high-grade, general-obligation bonds.

• Go for dividends.  The main reason behind this is because dividend income, which is generated from company profits paid out to shareholders, helps offset fluctuations in a stock’s share price, creating a cushion during turbulent markets.

• Consider alternative asset classes. This includes classes such commodities, annuities and real estate, just to name a few.

The most important rule of all is to have a strategy, and better yet, use it. We follow the trend lines to determine what positions we’re taking, and a stop loss determines our sell point. Read more about the strategy in our new book, The ETF Trend Following Playbook.

For more stories on trend following, visit our trend following category.

Kevin Grewal contributed to this article.

According to Randall W. Forsyth of Barron’s, the rally has been specifically seen in the credit markets, in particular corporate securities as opposed to lower-risk Treasury securities.

One reason that bond ETFs are remaining attractive it because the credit markets are giving investors a better return than the near-zero return earned in money-market and cash accounts.  Additionally, with the ever-growing number of options available, bond ETFs enable investors to make both bearish and bullish plays on the market.

If the economy improves, corporate credit will benefit. If this happens, Treasury yields are apt to rise. Conversely, if the economy falls short of the bulls’ expectations, Treasury yields may fall but corporate spreads could widen and hurt corporate bond returns. Have a strategy in order to protect yourself.

The iShares iBoxx $ Investment Grade Corporate Bond (NYSEArca: LQD) is up 9.3% year-to-date and has a yield of 5.33%.

The SPDR Barclays Capital High Yield Bond Fund (NYSEArca: JNK) is up 31.3% year-to-date with a yield of 12.9%.

Even municipal bonds have seen a nice uptrend.  Take a look at the iShares S&P National Municipal BondETF (NYSEArca: MUB) which is up 8.7% year-to-date with a yield of 3.63%.  Additionally, State Street Global Advisors recently launched the SDPR Standard & Poor’s VRDO Municipal Bond ETF (NYSEArca: VRD),which is designed to provide investors with access to muni variable-rate demand obligations.

For more stories on bond ETFs, visit our bond ETF category.

Kevin Grewal contributed to this article.

For full disclosure, Tom Lydon’s clients own shares of LQD.

The Commerce Department reported that new home sales edged up 0.7% in August, however, this increase fell short of the 1.6% expected by economists.  This is good news, but investors were unsure how to take it due to its discrepancy from anticipated results.  The news sent the iShares US Dow Jones Real Estate Index (NYSEArca: IYR) up 0.2% in morning trading.

In other news, the Commerce Department reported a decline in orders meant to last three years or longer by 2.4%, after increasing 4.8% in July and missing analyst expectations of an increase by 0.5%.  The drop was due primarily to a sharp fall in demand for commercial aircraft, a highly volatile portion of the orders report. Even excluding aircraft and other transportation goods, orders were flat in August.

In Philadelphia, a Group of 20 world leaders are uniting behind a plan to force banks to tie compensation more closely to risk and tighten capital requirements, while they agreed to maintain stimulus measures to spur the global economy.  Additionally, they are turning their attention from crisis management to overhauling the rules governing financial markets as the group assumes the mantle as the world’s main forum for global economic cooperation, states Simon Kennedy and Gonzalo Vina of Bloomberg.

In the fixed income world, benchmark borrowing costs for highly rated state and local governments dropped to a 42-year low this week, as the pace of new municipal-bond issues slowed and cash flowing into mutual funds accelerated to a record.  The weekly Bond Buyer 11-Bond index, which tracks tax- exempt yields on 20-year general-obligation debt with an average Aa1 rating, fell 14 basis points, or 0.14 percentage point, to 3.79 %, its sixth straight decline.

Overall, the Dow Jones Industrial Average was down 0.1%, the S&P 500 dropped 0.1% and the Nasdaq gave up 0.4%.

For more stories on real estate, visit our real estate category.

Kevin Grewal contributed to this article.

A study conducted by Matt Hougan and Dave Nadig over at Index Universe indicates this and concludes that the more liquid the underlying market, the lower the average premiums and discounts.

• First, they looked at Treasuries and concluded that investors shouldn’t worry about premiums and discounts in traditional Treasury ETFs. They did find, however, that premiums and discounts got larger as one moved out of the yield curve.

• Next, they looked at agency bonds such as Barclays Agency Bond Fund (AGZ), and concluded that both the average and extreme premiums and discounts were small.

• The third asset class analyzed were Treasury Inflation Protected Securities (TIPs), which are slightly less liquid than the two previously mentioned asset classes, but still resulted in small average and extreme premiums and discounts.

• The fourth class analyzed were blended funds, and the conclusion was that the illiquid corporate exposures had an impact on premiums and discounts.  Of the four blended funds looked at, three traded at a premium every day.

• Premiums and discounts really took off in the corporate bond category, where all four ETFs analyzed traded at average premiums and discounts of 2% and consistently traded at a premium.

• For high-yield bonds, the data suggest that the average premium shrinks, but absolute premiums and discounts increased.

• Lastly, the notoriously illiquid municipal bond category was a bit different, mainly because of the methods that the providers of these funds are using.  Those that utilized cash creations had high average average premiums and discounts. Those premiums and discounts shrink with cash creations.

In conclusion, tighter premiums and discounts can be found in the more liquid fixed income ETFs and are not an issue for traditional Treasuries. As for bond ETFs in general, they enable investors to gain the kind of diversity that would be cost-prohibitive for most small investors to achieve.

For more stories on bond ETFs, visit our bond ETF category.

Kevin Grewal contributed to this article.

Last year, investors turned to Treasuries as a last ditch wealth-preservation effort. Today, Treasuries have been made less appealing as prices fall and the government runs up a deficit, according to Financial Planning. Tax rolls are also down at the state and city level, which doesn’t make the outlook for municipal bonds that much better.

But investors have alternatives that can give diversification and varying yields:

• Intermediate bond funds that include a mix of government, mortgage and investment-grade corporate bonds
• Treasury inflation-protected securities (TIPs)
• Non-government investments, such as corporate bonds

Treasury bond prices may continue to fall for the time being. The government is issuing more debt, the economy is stabilizing and the Federal Research is purchasing more Treasuries, a recipe for declining bond prices, says John Parry for Reuters. This has put the central bank in a quandary: lower demand for safe havens means higher yields, which threatens to keep a lid on consumer borrowing, further hampering economic growth.

• PowerShares Insured National Muni Bond (PZA): up 9.3% year-to-date; yields of 4.9%

• iShares Lehman 7-10 Yr Treasury Bond Fund (IEF): down 7.7% year-to-date; yields 3.9%

• iShares Lehman TIPS Bond Fund (TIP): up 3.2% year-to-date; yields 4.4%

• iShares iBoxx $ Invest Grade Corp Bond (LQD): up 4.5% year-to-date; yields 5.6%

For more information on bonds, visit our bonds category.

For full disclosure, Tom Lydon’s clients own shares of LQD and TIP.

Max Chen contributed to this article.