'Build America' ETF Has Escape Hatch

NEW YORK (TheStreet) -- PowerShares is planning to introduce a new ETF that will invest primarily in Build America Bonds.

While the new fund is certainly unique in its theme, it is the fund's contingency plan that should warrant investor attention. In an age of regulatory pressure and increasing competition, ETF contingency plans may become the new trend in a booming industry.

The Securities and Exchange Commission filing for the new fund states that the ETF will invest in securities that comprise the Merrill Lynch Build America Bond Index. Since the launch of the federal stimulus program, about $27 billion in direct pay, dollar-denominated Build America Bonds have been issued by municipalities. Tax treatment of the bonds varies depending on the issuing municipality.

Fixed-income products have become an incredibly popular segment of the ETF industry, so it's no surprise that Invesco(IVZ Quote)-owned PowerShares is looking for unique ways to break ground on new products.

In 2009, the two biggest asset-gathering funds for ETF giant iShares have been the iShares Barclays TIPS ETF(TIP Quote) and the iShares iBoxx Investment Grade Corporate Bond ETF(LQD Quote).

The striking part of PowerShares' new ETF filing is the acknowledgement that the new ETF strategy will likely have a limited life span. Under the Federal Stimulus Act, Build America Bonds are set to be discontinued at the end of 2010. The prospectus for the new fund notes that unless the provision for these bonds is extended, availability of the bonds could become limited and liquidity could dry up quickly.