First Trust Advisors L.P. (“First Trust”), a provider of more than 200 investment products, many of which offer transparency, tax efficiency and a rules-based approach to stock selection, has launched a new actively managed exchange-traded fund (“ETF”), the First Trust Preferred Securities and Income ETF (NYSEARCA:FPE).
“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”
The First Trust Preferred Securities and Income ETF (“the Fund”) seeks total return and to provide current income by investing primarily in preferred securities and income-producing debt securities, including corporate bonds, high-yield securities and convertible securities. Under normal market conditions, at least 80 percent of the Fund’s net assets, including investment borrowings, will be allocated to these asset classes.
Stonebridge Advisors LLC (“Stonebridge”), a Wilton, CT-based Registered Investment Advisor, serves as the Fund’s sub-advisor and manages its portfolio. Stonebridge provides highly specialized expertise in preferred and hybrid securities for institutional investors and high-net-worth individuals. Its vast experience in this asset space has helped the Stonebridge team develop a disciplined and conservative style in managing portfolios of preferred and fixed-income securities. Stonebridge’s investment methodology, which it believes may deliver superior returns to clients, combines bottom-up and top-down approaches to security selection in order to determine which investments offer the best relative value.
Preferred securities 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. 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.
“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,” said Scott Fleming, President and Chief Investment Officer of Stonebridge. “We believe our conservative investment approach is the best way to provide the potential for superior investment results for our clients.”
First Trust and Stonebridge believe preferred securities have the potential to enhance an investor’s overall return, deliver meaningful diversification and decrease portfolio volatility because the historical correlations of preferred securities to other asset classes have been low. Preferred securities have also 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.
In addition, since preferred securities’ yields could be higher than those of other investment-grade products, they may be able to produce a high stream of income without incurring significantly more risk.
“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,” said Robert Carey, CFA, Chief Market Strategist of First Trust. “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.”
For more information about First Trust, please contact Chris Moon of JCPR at 973-850-7304 or [email protected].
About First Trust
First Trust Advisors L.P., along with its affiliate First Trust Portfolios L.P., are privately-held companies which provide a variety of investment services, including asset management and financial advisory services, with collective assets under management or supervision of approximately $67 billion as of January 31, 2013 through unit investment trusts, exchange-traded funds, closed-end funds, mutual funds and separate managed accounts. First Trust is based in Wheaton, Illinois. For more information, visit http://www.ftportfolios.com.
The Fund lists and will principally trade its shares on the NYSE Arca, Inc.
Investors buying or selling Fund shares on the secondary market may incur customary brokerage commissions. Market prices may differ to some degree from the net asset value of the shares. Investors who sell Fund shares may receive less than the share’s net asset value. Shares may be sold throughout the day on the exchange through any brokerage account. However, unlike mutual funds, shares may only be redeemed directly from the Fund by authorized participants, in very large creation/redemption units.
The Fund’s shares will change in value, and you could lose money by investing in the Fund.
Preferred securities combine some of the characteristics of both common stocks and bonds. Preferred securities are typically subordinated to bonds and other debt instruments in a company’s capital structure, in terms of priority to corporate income. Unlike preferred stocks, distributions from trust preferred securities are treated as interest rather than dividends for federal income tax purposes and therefore, are not eligible for the dividends received deduction and do not constitute qualified dividend income. Distributions on trust preferred securities will be made only if interest payments on the related interest-bearing notes of the operating company are made.
Preferred securities are subject to credit risk, interest rate risk and income risk. Credit risk is the risk that an issuer of a security will be unable or unwilling to make dividend, interest and/or principal payments when due and the related risk that the value of a security may decline because of concerns about the issuer’s ability to make such payments. Credit risk may be heightened if the fund invests in “high-yield” or “junk” debt. Interest rate risk is the risk that if interest rates rise, the prices of the fixed-rate instruments held by the Fund may fall. Income risk is the risk that if interest rates fall, the income from the Fund’s portfolio will decline, as the Fund intends to hold floating rate debt that will adjust lower with falling interest rates.
The Fund may invest in lower-quality debt issued by companies that are highly leveraged. Lower-quality debt tends to be less liquid than higher-quality debt.
The Fund is subject to market risk. Market risk is the risk that a particular security owned by the Fund or shares of the Fund in general may fall in value.
You should be aware that an investment that is concentrated in securities of companies in the financial sector involves additional risks, including limited diversification. Financial companies are especially subject to the adverse effects of economic recession, currency exchange rates, government regulation, decreases in the availability of capital, volatile interest rates, portfolio concentrations in geographic markets and in commercial and residential real estate loans, and competition from new entrants in their fields of business.
The Fund may invest in REITs. Companies involved in the real estate industry are subject to changes in the real estate market, vacancy rates and competition, volatile interest rates and economic recession.
The Fund is classified as “non-diversified.” A non-diversified fund generally may invest a larger percentage of its assets in the securities of a smaller number of issuers. As a result, the Fund may be more susceptible to the risks associated with these particular companies, or to a single economic, political or regulatory occurrence affecting these companies.
An investment in a fund containing securities of foreign issuers is subject to additional risks, including currency fluctuations, political risks, withholding, the lack of adequate financial information, and exchange control restrictions impacting foreign issuers.
The Fund invests in depositary receipts. Depositary receipts may be less liquid than the underlying shares in their primary trading market. Investment restrictions in certain countries may adversely impact the value of depositary receipts because such restrictions may cause equity shares of the underlying issuer to trade at a discount or premium to the market price of the depositary receipts.
The Fund is subject to management risk because it is an actively managed portfolio. In managing the Fund’s investment portfolio, the sub-advisor will apply investment techniques and risk analyses that may not have the desired result. There can be no guarantee that the Fund will meet its investment objective.
You should consider the Fund’s investment objectives, risks, and charges and expenses carefully before investing. Contact First Trust Portfolios L.P. at 1-800-621-1675 or visitwww.ftportfolios.com to obtain a prospectus or summary prospectus which contains this and other information about the Fund. The prospectus or summary prospectus should be read carefully before investing.