Deutsche Asset & Wealth Management, a division of Deutsche Bank AG and a provider of exchange-traded funds, has announced the launch of two new ‘industry-first’ products from its stable of exchange-traded products on the NYSE Arca.
Though ETFs focused on municipal bonds have ballooned to $12.3 billion dollars in assets as of year-end 2012 from $600 million in 2007, the db X-trackers Municipal Infrastructure Revenue Bond Fund (RVNU) and the db X-trackers Regulated Utilities Funds (UTLT) gives investors access to municipal infrastructure revenue bonds and utilities, respectively – sectors currently untapped by other issuers.
Revenue bonds are issued for a wide range of reasons including maintenance of public water and power supplies, building of toll roads and tunnels, replacement and repair of bridges and roads, and for construction of mass transport systems such as ports and airports. Estimates suggest about two-third of municipal market are revenue bonds.
RVNU is the first ETF that offers targeted access to infrastructure revenue bonds that are backed by revenue streams from infrastructure projects. It tracks the DBIQ Municipal Infrastructure Revenue Bond Index, a benchmark of tax-exempt municipal securities issued by states, cities, counties, districts, their respective agencies and other tax-exempt issuers.
Also, the index is designed to only hold bonds that are issued by state and local municipalities where the principal and interest are generated from dedicated revenue streams or double-barreled entities (where payments are backed by both a dedicated revenue stream and a general obligation pledge).
Some of the constituents of the benchmark have monopolistic qualities such as airports, and have stable investment-grade credit quality. However, you should note that airport bonds are dependent on the general stability of the airline industry and the stability of a particular carrier that uses the airport as hub. Air traffic generally follows the broader economic trends and is affected by fuel prices.
The underlying index has an average coupon of 5.17 percent and the yield to worst (the lowest potential yield that that a bond can offer without the issuer actually defaulting) was calculated at 3.22 percent, according to the fund’s factsheet.
RVNU has a gross expense ratio of 0.30 percent.
The other ETF – the db X-trackers Regulated Utilities Fund (UTLT) combines the potential for higher equity returns with the lower volatility and income potential of fixed-income.
UTLT tracks the DBIQ Regulated Utilities Index and provides long-term inflation hedge. The underlying index is a total-return index and had a dividend yield of 3.8 percent on the fund launch date. A total return index tracks capital gains and assumes all cash dividends are reinvested back into the underlying index. The low dividend yield is attributed to stable cash flows and the low volatility of the index-constituents.
Regulated utilities earn a return on their investment that’s decided by a regulatory authority. The steady cash flows of utilities provide ballast during adverse market conditions. These firms can approach regulators during periods of high inflation for permission to pass through higher costs to consumers to maintain their expected returns.
To be included in the index, a company’s ancillary or non-utility businesses should not contribute more than 25 percent of the company’s EBITDA in any of the previous three years.
The index contains securities of issuers of large, medium or small market-capitalization firms in the US or other developed markets (except Japan) which meet certain market capitalization and liquidity requirements. Major holdings included National Grid, Dominion Resources Inc, Southern Company, Duke Energy Corp and American Electric Power.
UTLT has a gross expense ratio of 0.45 percent.
Disclosure: No holdings