First Trust Plans Target Date Bond ETF

By
ETF.com Staff
July 16, 2010
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First Trust files to offer target date maturity ETFs, joining iShares and Claymore, which have blazed a new trail in the still-developing world of fixed-income exchange-traded funds.

First Trust, an ETF company known mostly for its First Trust ISE-Revere Natural Gas Index Fund (NYSEArca: FCG), filed with the Securities and Exchange Commission to gain permission to offer target maturity date bond ETFs, the first of which will focus on U.S. investment-grade corporate debt.

The plan will put the Wheaton, Ill.-based firm in the company of iShares and Claymore, two ETF providers that have already rolled out target maturity date ETFs that effectively offer investors something similar, though not identical, to holding an individual bond to maturity.

That’s huge, because rising rates are dangerous for bond-fund investors. An actual bond can be held indefinitely and redeemed at its full par value at maturity, making price declines that accompany rising rates irrelevant unless you plan on selling before then. Traditional bond funds don’t have maturity dates, and investors who need every bit of their investments can lose a lot if they have to draw on principal in the middle of a rate-hike cycle.

The filing said the company plans on calling its first target maturity date ETF the First Trust 2020 Target Term Corporate Bond Fund and that it will mature at the end of 2020.

Objectives

The fund’s main objective will be to provide steady income from coupon payments and return of principal at its target term date. But the ETF will also have a secondary objective of seeking additional total return, the filing said.

First Trust said principal of bonds that mature within about a year prior to the target term date will be reinvested into high-quality money market instruments.

Competition

Last month, Lisle, Ill.-based Claymore launched seven target date ETFs, with maturity dates beginning at the end of 2011 and extending through the end of 2017. Each of the funds, which have a 0.24 percent expense ratio, will close upon maturity, with investors getting net asset value of all the bonds in the portfolio.

Claymore followed iShares, the world’s biggest ETF company, in offering maturity date bond funds, though the iShares products are focused on tax-free municipal bonds. The six iShares ETFs, with maturity dates between 2012 and 2017, each charge 0.30 percent in fees a year.

In its exemptive relief filing, First Trust didn’t name a price for its proposed fund.

Exemptive relief grants ETF firms exception to sections of the Investment Act of 1940 and are just the first step in the path to launching ETFs. It often takes at least six to 12 months from the date of the initial filing for a company’s first ETF to hit the market.

First Trust’s natural gas ETF, FCG, had about $393 million in assets as of July 14, according to daily data compiled by IndexUniverse.com.

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