By Patrick Watson
American investors now have yet another way to loan their money to the government. This time the conduit is SPDR Nuveen Barclays Capital Build America Bond ETF (BABS), which began trading Thursday (5/13/2010).
BABS will be the second ETF to focus on this niche of the fixed-income market. The other is PowerShares Build America Bond Portfolio (BAB). Look for a lot of confusion between these similarly-named funds with almost identical ticker symbols. Here is the difference: BABS is not BAB, BAB is not BABS, but both BAB and BABS contain BABs. Clear enough?
Do not fear, I can explain. Build America Bonds, or BABs, are a new type of municipal bond authorized by the 2009 economic stimulus law. They are issued by state and local governments in order to fund capital spending projected – roads, buildings etc. Unlike regular municipal bonds, their interest is not tax-exempt at the federal level. The U.S. Treasury subsidizes BABs and guarantees the principal, allowing them to pay a higher interest rate then normal muni bonds.
For investors, BABs are in essence a higher-yielding Treasury bond. The theory behind this gift is that the projects funded by BABs will provide jobs and help the economy recover. Whether that is true or not, BABs have proven popular and the ETF industry wants in on the action.
PowerShares launched BAB back in November and now has around $300 million under management in the fund. That’s enough to entice competition, so now SPDR is in the market with their ETF.
BAB and BABS are similar in many ways. The SPDR fund tracks an index of Build America Bonds from Barclays Capital while PowerShares follows a similar index from Bank of America/Merrill Lynch. Both portfolios have a duration in the 10-12 year range. Both have expense ratios of 0.35%.
SPDR has engaged Nuveen Asset Management as sub-advisor for BABS. Nuveen will attempt to track the index but is not required to make the portfolio an exact match for the index holdings. This means there is a possibility that BABS will not track its index as closely as other ETFs – which could be either positive or negative.
Another point to think about is that the law allowing states and municipalities to issue BABs expires at the end of 2010. Congress may or may not extend the authorization into the future. Programs like this are seldom ended once they begin, but the future is still a little murky.
For more information, check out the BABS overview page at the SPDR site.
Disclosure covering writer, editor, and publisher: No positions in BAB, BABS or BABs. No positions in any of the companies or ETF sponsors mentioned. No income, revenue, or other compensation (either directly or indirectly) received from, or on behalf of, any of the companies or ETF sponsors mentioned.