First Trust, the Wheaton, Illinois-based investment manager and exchange-traded funds provider, has launched the First Trust Preferred Securities and Income ETF (FPE), the first actively-managed preferred securities fund. The new ETF aims to provide robust current income by primarily investing in preferred securities and income-producing debt securities including corporate bonds, convertible securities and high-yield securities.
The fund portfolio consists of about 80 companies with low concentration ratio for the top ten funds to avoid Concentration Risk and offer better diversification. Stonebridge Advisors, a specialist in hybrid and preferred securities manages the portfolio and serves as the fund’s sub-advisor.
FPE is focused on financials with insurance (20.74 percent), commercial banks (19.50 percent), real estate investment trusts or REITs (17.73 percent) and capital markets (14.75 percent) being allocated the top slots. Diversified financial services (5.01 percent), consumer finance (3.50 percent), diversified telecommunication services (3.50 percent) and wireless telecommunication services (2.49 percent) are the other important holdings of the fund. However, the fund is classified as “non-diversified” and hence, may invest a relatively high percentage of assets in a handful of issuers.
The fund invests at least 60 percent of its net assets in investment grade securities (BBB-/Baa3), or unrated securities judged to be of equivalent quality. FPE will not invest more than 40 percent of net assets in securities below investment grade (BB+/Ba1 or lower).
Preferred securities (or preference shares) are similar to bonds in that they are sold on the basis of yield and pay a fixed or floating coupon, but are traded like equities in major exchanges. On the balance-sheet, they sit at the junction of debt and equity and often referred to as quasi-debt instruments. They have preference over common stocks in the payment of dividends and liquidation of assets, but are generally junior to all forms of debt, including both senior and subordinated debts.
Preferred securities, like most hybrid instruments, have embedded call dates which typically come due five or ten years after issuance and therefore lowers the effective duration of longer-dated securities. However, preferred stocks with shorter maturities are attractive in these times of low interest-rates, because they are less sensitive to interest rate fluctuations, but provide relatively high levels of income. The anticipated average duration of securities held in the portfolio is three to 12 years.
Preferred stocks can also enhance overall return (total return) and deliver meaningful diversification and lower portfolio volatility because of low correlation to other asset classes. They can be a source of a stable income stream since they are senior to common stocks in the capital structure and have historically paid dividends more regularly.
FPE has an expense ratio of 0.85 percent.
Disclosure: No holdings
Contact Ulli