Low-Cost Exposure to Taxable Municipal Bonds
By investing in Build America Bonds, this fund gets exposure to taxable municipal bonds with interest payments subsidized by the federal government.
The recent credit troubles in Detroit and Puerto Rico should not scare investors away from the municipal bond market. Many of these securities offer similar--or better--yields than corporate bonds, with comparable credit risk. However, they do tend to carry greater interest-rate risk. PowerShares Build America Bond ETF (BAB) may be an ideal offering for investors who can accept this risk.
This exchange-traded fund offers diversified market-cap-weighted exposure to U.S. dollar-denominated Build America Bonds issued by U.S. state and territory municipalities. Build America Bonds are taxable municipal bonds that were issued as part of the American Recovery and Reinvestment Act of 2009. Although these bonds are not tax-exempt at the federal level, they may be tax-exempt at the state level for investors residing in the jurisdiction of the issuer. When these bonds were first issued, the federal government subsidized 35% of the issuers' interest cost. However, the government has since reduced this subsidy to 27.7% of the issuers' interest expenses because of sequestration.
Thomas Boccellari does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.