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PowerShares Plans Build America Bond ETF

by Michael Johnston on September 21, 2009

PowerShares, known as a pioneer in the actively-managed and “intelligent” indexed ETF arenas, reportedly has another innovative exchange-traded product in the works. Bloomberg reports that the company has plans to start an ETF that holds primarily Build America Bonds, taxable municipal debt subsidized by the federal stimulus plan.

The Build America Bond program is a part of the American Recovery and Reinvestment Act of 2009 designed to provide funding for state and local governments at lower borrowing costs. Tax-exempt bonds have traditionally been a major source of capital for state and local governments, but the local recession has hampered their ability to raise new funds via these securities.

Build America Bonds are taxable debt securities issued by state and local governments that provide them access to the traditional corporate debt markets. But here’s the twist: the Treasury Department will make a payment to the issuer of Build America Bonds (i.e., cash-strapped state and local governments) equal to 35% of the interest rate. So, for example, if the city of Chicago issues Build America Bonds with an interest rate of 10%, it would be entitled to a payment of 3.5% from the Treasury Department, thereby reducing the effective interest rate to 6.5%. It is hoped that the program will allow local governments to issue debt at attractive interest rates, improving their ability to raise capital and give a much-needed boost to their budgets.

According to Bloomberg, Build America Bonds had their first public offerings in April, and grew to more than $15 billion at the end of the second quarter and nearly $33 billion today. Earlier this month, Boston-based Eaton Vance filed to open a mutual fund targeting these securities.

For more information on Build America Bonds, see the Treasury press release [.pdf]

Disclosure: No positions at time of writing.