J.J. Kenny Drake has launched three new municipal total-return indexes intended for use as benchmarks by mutual funds, private account managers, swaps traders and exchange-traded funds.
The suite includes two tax-exempt indexes and an index for fast-growing Build America Bonds, a taxable muni structure created in February 2009.
“Dealers rely on us for bid sides and quoted markets on hundreds of Cusips,” said Noel Chandonnet, managing director at J.J. Kenny Drake. “It’s a logical extension of our business to come out with indices that reflect the movement of the market on a daily basis.”
The Build America Bond index tracks investment-grade BAB Cusip numbers with at least $100 million par value.
There are 213 outstanding BABs Cusips of at least $100 million par, according to Bloomberg LP. The Cusips represent $71.3 billion in par value, or a bit more than half the $128.66 billion in BABs outstanding.
Though the index launched recently, J.J. Kenny used historical information to post performance retroactively.
The BAB sector has delivered a return of 12.9% since the beginning of February, according to the new index.
By contrast, the Wells Fargo BAB index that launched last year indicates a 7.3% return in that time.
More than a year into the BAB program, several vehicles already require indexes reflecting the sector’s performance.
“We wanted to get into the BAB space because it’s still relatively untapped,” Chandonnet said. “There’s been some clamoring for product.”
There are two exchange-traded funds striving to mimic returns on a BABs index. The $521.4 million PowerShares Build America Bond Portfolio strives to track the BofA Merrill Lynch Build America Bond Index, while the $15.7 million SPDR Nuveen Barclays Capital Build America Bond fund seeks to replicate the Barclays Capital Build America Bond Index.
J.J. Kenny also launched two tax-free indexes: a short intermediate and a long intermediate.
The short intermediate index follows bonds with maturities of at least 13 months and less than eight years. The long intermediate index tracks bonds with maturities of at least 10 years and less than 21 years.
Both indexes are subsections of the S&P/Investortools Municipal Bond Index, a $1.2 trillion index tracking most of the rated universe of investment-grade tax-free state and local government debt.
These new indexes are meant to track liquid and highly rated municipals. They include Cusips with at least $2 million par from deals of at least $100 million, and are restricted to bonds rated A-minus or better by at least two rating agencies.
Chandonnet said the reliance on A-minus or better distinguishes the new indexes from some other investment-grade indexes that include triple-B rated bonds. Those lower-rated bonds can introduce higher volatility into investment-grade indexes, he said.
“We’re seeking to sidestep some of that volatility,” Chandonnet said.