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.
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.