BABZ will carry an expense ratio of 0.45% and aims to achieve its investment objective in focusing its asset base on taxable municipal debt securities which are publicly issued under the President Obama’s Build America Bond program. Furthermore, the fund generally invests in U.S. dollar denominated fixed income instruments that are investment grade but may allocate a percentage of assets to higher yield junk bonds which have a higher likelihood of default.
In regards to characteristics of Build America Bonds, they are special municipal bonds designed to help municipalities raise money to invest in infrastructure projects. The bonds are taxable; however, the Federal government pays a 35% subsidy on the interest payments to offset the tax hit. Additionally, issuance of Build America Bonds will cease on December 31, 2010 unless the relevant provisions of the American Recovery and Reinvestment Act of 2009 are extended. In the event that the Build America Bond program is not extended, the Build America Bonds outstanding at such time will continue to be eligible for the federal interest rate subsidy, which continues for the life of the Build America Bonds; however, no bonds issued following expiration of the Build America Bond program will be eligible for the federal tax subsidy.
The introduction of BABZ comes at a time when fixed income ETFs are witnessing an increase in assets as investors are shunning risk and looking for “safe” investment tools which enable some to pick up additional yield without taking on enormous risk.
As for competition, BABZ will be going up against the PowerShares Build America Bond Portfolio (NYSE:BAB), which has attracted more than $547 million in assets since its inception in December and the SPDR Nuveen Barclays Capital Build America Bond ETF (NYSE:BABS), the Nuveen Build America Bond Fund (NYSE:NBB) and the BlackRock Build America Bond Fund (NYSE:BBN).
Written By Kevin Grewal from Smart Stops Disclosure: No Positions
Kevin Grewal serves as the editor at www.SmartStops.net, where he focuses on mitigating risk and implementing exit strategies to preserve equity. Additionally, he is the editor at The ETF Institute, which is the only independent organization providing financial professionals with certification, education, and training pertaining to exchange-traded funds (ETFs). Prior to this, Grewal was an analyst at a small hedge fund where he constructed portfolios dealing with stock lending, exchange-traded funds, arbitrage mechanisms and alternative investments. He is an expert at dealing with ETFs and holds a bachelor’s degree from the University of California along with a MBA from the California State University, Fullerton.