First Trust Advisors has launched two exchange-traded funds (ETFs) that invest primarily in closed-end funds (CEFs), the First Trust CEF Income Opportunity ETF (FCEF) and the First Trust Municipal CEF Income Opportunity ETF (MCEF).
Both funds seek to provide income by investing primarily in CEFs. FCEF has a secondary objective of total return.
MCEF invests primarily in CEFs that invest in municipal debt securities and will seek to provide income that is exempt from regular federal income tax.
The funds are the first actively managed ETFs that invest in CEFs.
The funds invest in a broad range of CEFs, which First Trust believes have the potential to provide a more stable income stream than other managed investment products. The nature in which CEFs trade may present additional opportunities as CEF shares are not redeemable. Instead, they are bought and sold on the secondary market and their share prices generally fluctuate based on supply and demand. Because of this, CEFs can trade at a premium or a discount to their net asset value (NAV) and can offer potential investment opportunities.
CEFs maintain a relatively fixed pool of investment capital and are not subjected to potentially large cash inflows and outflows which can dilute distributions over time. However, stable income cannot be assured.
Because a CEF's share price can deviate from its NAV, First Trust believes it pays to have a specialist in the field monitoring these securities daily. As market conditions change, the funds have the flexibility to adjust portfolio holdings, attempting to take advantage of the inefficiencies and opportunities that are present in the CEF marketplace.
“Advisers and their investors have been underserved when it comes to actively managed solutions in the closed-end fund space. We believe through our rigorous proprietary model and years of experience in the CEF space that we can provide advisers and their investors with a better overall experience,” says Ken Fincher, senior vice president at First Trust and the funds’ portfolio manager.