Deutsche Bank today is rolling out two ETFs—one an equities fund focused on utilities, the other a muni strategy focused on revenue bonds—that would cater to investors’ appetite for income through somewhat differently calibrated approaches than those that currently prevail in the world of ETFs.
The db X-trackers Municipal Infrastructure Revenue Bond Fund (RVNU) appears to be the first muni ETF that focuses exclusively on the revenue-bond space. RVNU has a net annual expense ratio of 0.30 percent, or $30 for each $10,000 invested. The fund’s cost reflects a 7-basis-point waiver, according to the prospectus .
The db X-trackers Regulated Utilities Index Fund (UTLT), for its part, appears to be distinct in that it will be organized around an index that cherry-picks companies with at least 75 percent of their earnings coming from regulated businesses. UTLT will cost 0.45 percent, or $45 per $10,000 invested, after fee waivers, according to the prospectus detailing the ETF.
The two funds together reflect Deutsche Bank’s aim to offer up alternative sources of income at a time when ultra-low rates in the era following the 2008 crash — coupled with the risk of capital losses for existing bondholders, should rates begin to normalize—have led many investors to look for yield in new pockets of the world of income-producing investments.
In the case of UTLT, the regulated utilities fund, getting income from a fund that isolates such companies can mean grappling with lower risk than is the case with nonregulated utilities to the extent that many business arrangements for regulated utilities are based on dependable long-term contracts.
The DBIQ Regulated Utility Index will invest in so-called regulated utilities companies, or those whose earnings before interest, taxes, depreciation and amortization (EBITDA) were made up of no more than 25 percent non- or unregulated utilities in any one of the most recent three years.
The fund will include exposure to names in several developed countries with the exception of Japan, the prospectus said.
Deutsche pointed out in the filing detailing UTLT that the fund’s underlying index is a total return index, meaning it tracks capital gains and assumes that any cash distributions are reinvested back into the index.
Regarding the new muni ETF RVNU, other existing bond ETFs have combined holdings of revenue bonds and general obligation (GO) bonds, the latter being issued by city, county and state governments. Revenue bonds derive their stream of income through revenues of a given project the bond issue financed, such as a toll road or water system.
Revenue bonds are generally considered a bit more risky than GO bonds in that cities can rejigger budgets to support bond payments, but a project financed by a revenue bond that isn’t generating enough income to support bond payments is truly in a pickle. But coupons on such bonds can be higher as a result of the perception of risk; hence their allure.
RVNU will focus on U.S. long-term tax-exempt infrastructure-related revenue bonds.
The ETF, which also tracks a DBIQ index, is designed to provide exposure to bonds that were issued for the purpose of funding federal, state and local infrastructure projects like water and sewer systems, or toll roads and bridges, to name a few.
RVNU will focus on bonds for which generated income is wholly contingent on the municipal project they finance. As of March 31, the index underlying the strategy comprised some 517 securities with an average amount outstanding of $125 million.
All bonds must meet size requirements, be investment-grade and have a fixed-rate coupon, according to the prospectus.
Deutsche Bank currently has 10 ETFs under its db-X brand—five target-date funds and five country- or region-focused currency-hedged strategies. It currently manages about $313 million. The firm is also behind a vast roster of PowerShares-distributed strategies.
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