With the economy sluggishly plodding along and the Federal Reserve hinting at another round of quantitative easing, low interest rates are surely here to stay for a long time. Investors looking for income from their portfolios are having a tough time. Investment vehicles such as the iShares Dow Jones Select Dividend Index (NYSE:DVY) or PowerShares Financial Preferred (NYSE:PGF) are gaining popularity as these investors look for alternatives beyond traditional CDs and money market funds. Another security type created during the first stimulus package might be a good choice for those seeking income.
Building America: One Bond at a Time
The state of America's infrastructure is quickly turning poor. Millions of dollars need to be spent on improving the nation's roadways, sewer systems and telecommunications infrastructure. However, the credit crisis affected states and municipalities just as much as it did individuals. Included in the American Recovery and Reinvestment Act, Build America Bonds were created as way for states and cities to help tap the constrained credit markets. Stevens Point, Wisconsin, was first to test the security, selling $3,650,000 worth of bonds. Since then, the program has become increasingly successful. More than $125 billion worth of bonds have been sold, accounting for more than 21% of all new issuances.

Build America Bonds work slightly different than traditional munis. When a government issues a Build America Bond, it receives a cash subsidy from the federal government equal to 35% of the coupon interest rate on the bond. This makes these bonds cheaper as a funding solution. In exchange for that interest subsidy, Build America Bonds are taxable.

With the program set expire at the end of 2010; many governments have been issuing long maturity bonds in order to take advantage of the interest break, essentially changing the municipal market into a two-tier caste, with new tax-free bonds carrying shorter maturities and taxable munis carrying longer ones. For example, a recent Pennsylvania bond offering included $600 million of Build America Bonds with rates of 4.65% for 16 years and 5.45% for 20 years. Pennsylvania then issued $300 million worth of tax-free munis, with maturities of one to nine years at yields from 2% to 4.3%.

Adding Some BABs
The Obama administration has proposed that the program be made permanent or extended, and the interest rate subsidy be reduced to 28%. Even if this event doesn't occur, the long timelines of these bonds assure a robust secondary market. Build America Bonds offer high yields and could be exactly what income seekers need to round out a portfolio. BABs carry ratings from triple A to junk. A broad based strategy works best.

The PowerShares Build America Bond (NYSE:BAB) was the first exchange-traded fund to exploit the new security type. The fund also has the lion's share of assets, with more than $560 million under management. The fund holds 300 different bonds, ranging from tax-revenue bonds to water and sewer issues. The fund charges a cheap 0.35% and yields a healthy 5.22% dividend. Similarly, the SPDR Nuveen Barclays Build America Bond (Nasdaq:BABS) offers exposure, but hasn't managed to catch on like the PowerShares fund. The BAB SPDR only has about $20 million in assets.

Bond house PIMCO has managed to carve a niche with its actively-managed ETF products, such as PIMCO Enhanced Short Maturity Strategy ETF (Nasdaq:MINT). Recently, the asset manager added the PIMCO Build America Bond Strategy (Nasdaq:BABZ) to its arsenal. The active management function allows its managers to allocate a percentage of assets to higher-yield junk bonds in order to boost yield and returns.

Finally, the closed-ended Nuveen Build America Bond Fund (NYSE:NBB) uses leverage to boost its distribution yield to nearly 7%. The fund trades at a slight premium to its NAV, and it might be worth it for the extra boost in yield.

The Bottom Line
As interest rates continue to stay low, income seekers have to look at more alternatives to achieve yield. Build America Bonds offer investors away to help fund the nation's much needed infrastructure build out, while getting great dividends. The previous ETFs offer an easy way to add these securities to a portfolio. (For related reading, take a look at Build America Bonds: Should You Buy?)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Related Articles
  1. Mutual Funds & ETFs

    ETF Analysis: PowerShares FTSE RAFI Emerging Mkts

    Learn more about the PowerShares FTSE RAFI Emerging Markets ETF, a fundamentally weighted fund that tracks emerging market equities.
  2. Mutual Funds & ETFs

    ETF Analysis: iShares Cali AMT-Free Muni Bond

    Learn more about the iShares California AMT-Free Municipal Bond exchange-traded fund, a popular tax-advantaged ETF that dominates its category.
  3. Mutual Funds & ETFs

    ETF Analysis: SPDR S&P Emerging Markets Dividend

    Learn more about the SDPR S&P Emerging Markets Dividend Fund, a yield-focused exchange-traded fund tracking global emerging economies.
  4. Mutual Funds & ETFs

    ETF Analysis: First Trust Dow Jones Global Sel Div

    Find out about the First Trust Dow Jones Global Select Dividend Index Fund, and learn detailed information about characteristics and suitability of the fund.
  5. Mutual Funds & ETFs

    ETF Analysis: U.S 12 Month Natural Gas

    Learn about the United States 12 Month Natural Gas Fund, an exchange-traded fund that invests in 12-month futures contracts for natural gas.
  6. Mutual Funds & ETFs

    ETF Analysis: iShares Floating Rate Bond

    Explore detailed analysis and information of the iShares Floating Rate Bond ETF, and learn how to use this ETF as a defense against rising interest rates.
  7. Mutual Funds & ETFs

    ETF Analysis: ProShares UltraPro Short S&P500

    Find out information about the ProShares UltraPro Short S&P 500 exchange-traded fund, and learn detailed analysis of its characteristics and suitability.
  8. Mutual Funds & ETFs

    ETF Analysis: SPDR Barclays Investment Grd Fl Rt

    Learn more about the SPDR Barclays Investment Grade Floating Rate Fund, which tracks an index of highly rated floating debt securities.
  9. Mutual Funds & ETFs

    ETF Analysis: ALPS Medical Breakthroughs

    Learn more about a unique and innovative exchange-traded fund (ETF) in the biotechnology industry: the ALPS Medical Breakthroughs Fund.
  10. Mutual Funds & ETFs

    ETF Analysis: iShares US Healthcare

    Learn about the iShares U.S. Healthcare exchange-traded fund, which invests in a wide range of health care providers, hospitals and home care facilities.
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Exchange-Traded Fund (ETF)

    A security that tracks an index, a commodity or a basket of assets ...
  3. Exchange-Traded Mutual Funds (ETMF)

    Investopedia explains the definition of exchange-traded mutual ...
  4. Hard-To-Sell Asset

    An asset that is extremely difficult to dispose of either due ...
  5. Sucker Yield

    When an investor has essentially risked all of his capital for ...
  6. Lion economies

    A nickname given to Africa's growing economies.
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. What does a high turnover ratio signify for an investment fund?

    If an investment fund has a high turnover ratio, it indicates it replaces most or all of its holdings over a one-year period. ... Read Full Answer >>
  5. Does index trading increase market vulnerability?

    The rise of index trading may increase the overall vulnerability of the stock market due to increased correlations between ... Read Full Answer >>
  6. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>

You May Also Like

Trading Center

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!