First Trust Advisors is to launch two actively managed exchange-traded funds (ETFs), the First Trust Emerging Markets Local Currency Bond ETF and the First Trust Low Duration Mortgage Opportunities ETF.
The new funds are expected to begin trading on The NASDAQ Stock Market on 5 November 2014.
The First Trust Emerging Markets Local Currency Bond ETF seeks maximum total return and current income.
The fund invests in bonds, notes and bills issued or guaranteed by entities in emerging market (EM) countries that are denominated in the issuer’s local currency. The risk/return profile of EM local currency bonds is driven mainly by two components, local interest rates and foreign exchange (FX) fluctuations, which can be a significant driver of performance, either positive or negative. The fund will seek to provide the potential to benefit from both sources of return by actively managing the bond portfolio, while dynamically hedging (offsetting) the associated currency risk by adjusting hedge positions according to the market environment.
The First Trust Low Duration Mortgage Opportunities ETF primarily seeks to generate current income with a secondary objective of capital appreciation. Under normal market conditions, the fund will seek to achieve its investment objectives by investing at least 80 per cent of its net assets (including investment borrowings) in investment grade, mortgage-related debt securities and other mortgage-related instruments tied to residential and commercial mortgages. The fund targets high asset credit quality with at least 60 per cent of assets invested in the government-sponsored mortgage sector. The fund will seek to provide an attractive level of income while maintaining an effective duration target of three years or less. A focus on managing and limiting the average portfolio duration may help to limit price sensitivity. The portfolio managers believe thorough and continuous monitoring of overall housing market fundamentals, quantitative portfolio modelling, and the ability to rebalance the portfolio to stay within the fund’s three-year duration target is critical to achieving higher risk-adjusted returns.
Traditionally, fixed income ETFs that follow a market-cap weighted indexing approach typically invest a higher percentage of the fund’s assets in the most indebted issuers within the index, exposing investors to potentially overvalued or poorly structured market sectors.
“These funds provide a strategy for investors to gain exposure to two fixed income sectors in which we believe in-depth research and analysis, along with ongoing surveillance, can add significant value for investors,” says Ryan Issakainen, senior vice president and ETF strategist at First Trust. “Both funds may benefit from active portfolio management, which provides the flexibility to implement specific views, while targeting a more attractive trade-off between risk and return.”
The First Trust Emerging Markets Local Currency Bond ETF will be actively managed by First Trust Global Portfolios Ltd., the sub-advisor to the fund. Derek Fulton, chief executive officer, and Leonardo Da Costa, portfolio manager, both of First Trust Global Portfolios Ltd will serve as the portfolio managers of the fund.
The First Trust Low Duration Mortgage Opportunities ETF will be actively managed by First Trust Advisors LP Day-to-day management decisions are primarily made by Jim Snyder and Jeremiah Charles, Portfolio Managers and members of the First Trust Mortgage Securities Team.
