First Trust rolls out preferred securities and income ETF

Feb 13th, 2013 | By | Category: Alternatives / Multi-Asset

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First Trust, a US-based exchange-traded fund provider and investment manager, has launched the First Trust Preferred Securities and Income ETF (FPE), a new actively managed ETF providing current income by investing primarily in preferred securities and income-producing debt securities including corporate bonds, high-yield securities and convertible securities.

First Trust rolls out preferred securities and income ETF

The First Trust Preferred Securities and Income ETF invests in preferred securities and income-producing debt securities.

Stonebridge Advisors, a specialist in preferred and hybrid securities, serves as the fund’s sub-advisor and manages its portfolio. Stonebridge’s investment approach is characterised by top-down analysis and bottom-up, relative value security selection.

Preferred securities (also known as preference shares) are similar to corporate bonds in that they are sold on the basis of yield and pay a fixed or adjustable rate of return, but like equities, are traded on major exchanges. Essentially, they sit at the interchange of debt and equity on a company’s balance sheet.

Most preferred and hybrid securities have call dates which are five or ten years after their issuance dates, and therefore possess a call feature that shortens the effective duration of the longer-dated or perpetual securities. In the current low-interest-rate environment, preferred securities with shorter durations are attractive because they provide investors with relatively high levels of income but with less interest-rate sensitivity.

Preferred securities also have the potential to enhance overall returns (preferred securities’ yields could be higher than those of other investment grade products), deliver meaningful diversification and decrease portfolio volatility because the historical correlations of preferred securities to other asset classes have been low.

In addition, preferred securities have historically proven to be a more reliable source of income than common stocks as they are senior in the capital structure and have produced a more stable stream of income.

Scott Fleming, President and Chief Investment Officer of Stonebridge, said: “We believe that preferred securities are an important component of a well-diversified portfolio. This fund’s structure as an actively managed ETF gives us the opportunity to manage the fund not only to seek income and total return, but to react to market conditions and work to safeguard capital during changes in the market, especially if interest rates start to rise.”

Robert Carey, Chief Market Strategist of First Trust, added: “With the current opportunity in the preferred securities space, the fund may allow investors to potentially earn high yields while mitigating risk in various market environments. By focusing on market inefficiencies, along with the fund’s active management style, the portfolio managers can potentially provide a way for investors to seek attractive returns and diversified exposure to income-producing preferred securities.”

The fund will invest at least 60% of its net assets in securities rated investment grade (BBB–/Baa3 or higher) at the time of purchase by at least one independent rating agency, and unrated securities judged to be of comparable quality by the fund’s Stonebridge. The fund may invest up to 40% of its net assets in securities rated below investment grade (BB+/Ba1 or lower), so-called junk bonds, at the time of purchase.

The fund currently has 77 holdings, the top five of which are issued by Southern California Edison (SCE) Trust, Raymond James Financial, PNC Financial Services, PS Business Parks, and Aegon. As is typical of funds in this space, reflecting the make-up of traditional issuers of hybrid securities, the largest industry weights are insurance, commercial banks, REITs, capital markets, and diversified financial services.

The fund is listed on the NYSE Arca and comes with total annual fund operating expenses of 0.85%.

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