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Date Launched: Sep 20, 2010

Links: Factsheet (pdf), Website, Prospectus

Investment Strategy:

BABZ is an actively-managed ETF that provides investors with exposure to taxable municipal debt securities issued under the Build America Bond program. The fund invests in investment-grade debt and provides daily transparency of holdings. PIMCO conducts issuer-specific credit analysis to analyze each issuer in order to avoid municipalities with deteriorating credit quality. The active management pursued by the portfolio managers enables the portfolio composition to change when credit conditions change. At the date of writing, the fund held 37 different securities which had an average duration of 13.22 and an average maturity of 28.5 years. BABZ had a 30-day yield of 5.17%. The fund does not utilize any derivatives and does not invest in options, futures or swaps. The benchmark for the actively-managed fund is the Barclays Capital Build America Bond Index.

Portfolio Managers:

PIMCO serves as the investment manager of MUNI. PIMCO has more than $940 billion in assets under management as of Sep 30, 2009.

Danford O. Peterson – Senior Vice President at PIMCO, joined PIMCO in 2010 before which he served as Vice President at Goldman Sachs in the municipal bond trading group.

The Numbers:

Current Market Cap – $21.7 million

Expense Ratio – Capped at 0.45% till Oct 31, 2011 (by contractual agreement), 0.57% without fee waiver.

Average Volume – 18,634 shares

What’s special about it?

1. There are only 3 ETFs in the US that provide exposure to the Build America Bond sector. BABZ is the only fund that provides active management in the space in ETF form. The other two index ETFs are the PowerShares Build America Bond Portfolio (NYSEARCA:BAB) and the SPDR Nuveen Barclays Capital Build America Bond ETF (NYSEARCA:BABS).

2. BABZ managers can pick and choose which issuers they want exposure to through Build America Bonds and are not obliged to own the bonds just because they are part of the index. This discretion shows in the number of securities held by the fund. Where BABS held 93 securities and BAB held a whopping 301 securities, BABZ held only a select 37 securities.

Analysis:

Positives –

- Considering the relatively poor fiscal condition of various municipalities around the US due to budget deficits, active management in this space may be necessary to avoid holding onto each and every Build America Bond, regardless of the credit quality of the issuer.

- Unlike index bond ETFs, which depend on the rating agencies for credit analysis, PIMCO analyzes each municipality’s fundamentals and BABZ provides access to that expertise.

Negatives –

- BABZ has a marginally higher expense ratio which is 10 basis points more than the 0.35% expense ratio that BAB and BABS have. However, that 10 basis point difference may be justified given that investors are getting an actively-managed portfolio in return, as opposed to a passive one.

- The performance of BABZ in its short history has been nothing to call home about. While the Build America Bond sector as a whole has declined by about 7%, BABZ has not been able to beat its index counterparts as shown in the chart below.

Performance to Date, compared to the PowerShares Build America Bond Portfolio (BAB) and the SPDR Nuveen Barclays Capital Build America Bond ETF (BABS):

click to enlarge

Disclosure: No positions in above-mentioned names.

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Source: PIMCO's Build America Bond Strategy ETF: Weighing the Pros and Cons