Build America Bonds exchange traded funds (ETFs) have been around for nearly a year, but BABs themselves have rarely been as cheap relative to corporate securities. It could be a signal to start thinking about these funds.

Income-seeking investors may want to look no further than home if they are thinking about low-risk investments. The so-called BABs are taxable municipal securities on which the federal government pays the state and local issuers a subsidy of 35%. That is in lieu of granting tax exemption on the interest paid on traditional munis, reports Randall Forsyth for Barron’s. [Treasury Bond ETFs Keep Their Appeal.]

BABs have lagged the rally seen in other fixed income, however, mainly owing to both dour news about the finances of states and localities, as well as uncertainty about whether the BAB program will continue. [California Muni Bonds Are on Reprieve.]

Liquidity issues are plaguing the funds. If Congress doesn’t act, the BAB program will expire at the end of this year, which would further make them less liquid. The higher yields seen on these bonds is also a reflection of the liquidity. [PowerShares Expanding Build America Bond Line.]

BABs have appeal, though: they offer higher yields and improving credit quality – a tough thing to get in these times. ETFs that hold BABs can help diversify your risk if you’re concerned about default.

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

  • PowerShares Build America Bond (NYSEArca: BAB): up 2.2% in the last month; primarily holds bonds rated A/A or better; yields 5.49%.

  • SPDR Nuveen Barclays Capital Build America Bond (NYSEArca: BABS): up 2.6% in the last month; primarily holds bonds rated A or better; yields 5.59%

Build America Bond ETFs

Tisha Guerrero contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

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