Credit: Shutterstock photoPowerShares Unveils Build America ETF
November 17, 2009
SAN DIEGO (ETFguide.com) - PowerShares launched a new ETF that consists of municipal securities eligible to participate in the Build America Bond program created under the American Recovery and Reinvestment Act of 2009. The portfolio is based on the Merrill Lynch Build America Bond Index.
The Build America Bond Program ( BAB ) introduced by the U.S. Treasury with the objective to reduce borrowing costs of state and local governments. BABs are taxable bonds issued by state and local governments; the interests from the bonds is subsidized by the U.S. Treasury.
PowerShares explains that taxable municipal bonds have historically produced yields comparable to similarly rated corporate bonds, but have exhibited much lower default rates.
As mentioned in the 4-16-09 Weekly ETF Pick on municipal bonds, the ETF Profit Strategy Newsletter believes that, due to the financial strain felt by local municipalities, municipal bonds are likely to see higher default rates if the bear market resumes.
The mere fact that local states and government need federal support in securing new financing and interest payments could be a red flag in itself.
Unlike other muni bond funds, the interest income from BABs is not exempt from federal income taxes. Residents of the issuing state or local body may, however, be exempt from state and local taxes.
The fund is currently comprised of 24 holdings with an expense ratio of 0.35%. Securities included in the index are capitalization-weighted based on their current amount outstanding. The index is rebalanced monthly.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
