First Trust, the Wheaton, Ill.-based money management firm behind the AlphaDex ETFs, today is launching an actively managed preferred stock ETF that looks to join a roster of income-seeking strategies, but through active management.
Indeed, the First Trust Preferred Securities and Income ETF (NYSEArca: FPE) is the market’s first actively managed strategy to tap into preferred stocks—shares that behave similarly to corporate bonds because of their steady distributions, but with equitieslike features. The fund has a focus on finding the best relative values in the market.
FPE, which comes with an expense ratio of 0.85 percent, will invest in preferred and debt securities, but unlike most other indexed preferred strategies that tend to carry a heavy focus on financials, it will strive to be diversified on a sector level, First Trust’s Ryan Issakainen told IndexUniverse.
The launch marks yet another attempt by an ETF provider to cater to investor demand for income-generating strategies at a time when yields remain compressed in the more traditional fixed-income instruments such as Treasurys due to monetary policies that have kept interest rates at near-zero levels.
FPE's yield is currently estimated at around 5.5 to 6 percent, Issakainen said, in a strategy that ultimately seeks to provide investors with an opportunity to capitalize on the “nuances” of the preferred securities markets, such as its currently bigger-than-normal spread over Treasurys and the segment’s low correlation to other asset classes and the broader market through active management.
“Preferred securities have historically proven to be a more reliable source of income than common stocks as they are senior in the capital structure, have produced a more stable stream of income and have been less volatile,” First Trust said in paperwork it published on its website.
FPE will join others in the space like the behemoth $11.36 billion iShares S&P Preferred Stock Index Fund (NYSEArca: PFF)—a fund that allocates 40 percent to what it calls “diversified financials” and 25 percent to banks—and the PowerShares Financial Preferred Portfolio (NYSEArca: PGF), which has gathered $1.78 billion since inception.
Stonebridge Advisors, who will act as the fund’s subadvisor, will also actively manage risk exposure to fluctuations in interest rates by controlling the duration of the portfolio, Issakainen said.
The fund first went in registration in the fall of 2011.
Investors have fewer—but better—choices.
Sometimes what’s behind a very high dividend yield is truly surprising.
For VIX-related ETFs to work as that ‘magical’ hedge, you have to time the market. Good luck with that.
But this new product is different than other euro-hedged funds.