This Day On The Street
Continue to site
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

Red-Hot Municipal Funds

NEW YORK ( TheStreet) -- ETFs that invest in Build America Bonds have been on a tear. During the past year, SPDR Nuveen Barclays Capital Build America Bond (BABS) returned 25.2%, while PIMCO Build America Bond Strategy (BABZ) returned 22.5%, according to Morningstar. In contrast, the Barclays Capital Aggregate Bond index gained 7.3%.

The Build America funds focus on high-quality municipals with long maturities. That has been a recipe for success at time when nervous investors have been fleeing to Treasuries and other safe assets. Despite their big rally, the funds remain appealing for income investors. PowerShares Build America Bond (BAB) yields 4.4%, compared to a yield of 2.58% for 30-year Treasuries.

While most municipal bonds are tax free, the Build America issues are taxable. The bonds were introduced in 2009 as part of the American Recovery and Reinvestment Act. Under the legislation, the Treasury covers 35% of the cost of a municipality's interest payments on the bonds. The aim was to support municipalities that were struggling to cope with the financial crisis. States and cities jumped to issue the bonds because they were cheaper to use than traditional tax-free issues. About $181 billion of the securities have been issued.

Among the biggest buyers of the bonds have been pensions. Conservative institutions favor the Build America issues because most come with top ratings of AA and AAA. In addition, many of the bonds come with maturities of 20 years or longer, a desirable feature for institutions that must plan for long-term obligations. Many of the bonds are particularly safe because they are general obligation bonds, which are backed by the full taxing power of issuers. Other Build America Bonds are backed by essential services such as water and sewer systems, which rarely default.

Since 2010, no new bonds have been issued. President Obama has sought to continue the program, but Republicans in Congress have blocked the legislation. Even if no more bonds are issued, the Build America ETFs should continue operating for at least the next several years. Because most of the bonds have long maturities, they will continue making interest payments. Demand for the bonds should remain strong. Many institutional investors and index funds must hold the bonds because they are included in the Barclays Capital Aggregate index, a common benchmark used by many money managers. If there are no more Build America Bonds, then the ETFs would have to alter their portfolios eventually, perhaps including broader collections of taxable municipals.
1 of 2

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Real Money

More than 30 investing pros with skin in the game give you actionable insight and investment ideas.

Product Features:
  • Access to Jim Cramer's daily blog
  • Intraday commentary and news
  • Real-time trading forums
Only $49.95
14-Days Free
14-Days Free
BABZ $51.70 -0.23%
BABS $63.52 0.47%
BAB $30.31 0.23%
AAPL $93.69 -1.60%
FB $118.43 0.85%


Chart of I:DJI
DOW 17,667.98 +16.72 0.09%
S&P 500 2,051.12 -12.25 -0.59%
NASDAQ 4,725.6390 -37.5850 -0.79%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs