PIMCO, one of the world’s largest bond firms, just launched its latest municipal ETF, the PIMCO Build America Bond Strategy Fund (BABZ).
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 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 (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 (BABS), as well as two CEFs: the Nuveen Build America Bond Fund (NBB) and the BlackRock Build America Bond Fund (BBN).
Disclosure: No positions