First Trust, the fund company known in part for its Internet-focused exchange-traded fund, filed regulatory paperwork earlier this month detailing plans for an actively managed ETF that will own U.S. equities and will use options to add cash flow or help protect the portfolio from downside movement.
The First Trust Enhanced Low Beta Income ETF will invest primarily in U.S.-listed securities, and will also own international securities that trade on U.S. exchanges as American depositary receipts and global depositary receipts, the prospectus said. The fund will select securities using a mathematical optimization strategy that tilts the portfolio toward stocks with higher-paying dividends.
The options overlay will consist mostly of call options on the S&P 500 Index aimed at obtaining extra income from monthly premium payments. The company stressed in the filing that the options will be so-called covered calls.
Additionally, the fund will at times use a portion of the call option proceeds to purchase exchange-listed index puts to cushion the fund's performance when the market experiences severe declines.
“The option portion of the portfolio generally consists of covered calls and long puts on the Index,” the company said in the filing, adding that the fund may also contain put or call options on other indexes as part of its hedging strategy.
The company didn’t say in the filing what the fund’s price would be, but it did leave the door open to one day possibly including 12b-1 fees of 0.25 percent a year, though those won’t be part of the fund’s charges when it first comes to market.
First Trust also didn’t say what the fund’s ticker would be or on what exchange the ETF would have its primary listing.
First Trust is the 11th-largest U.S. ETF sponsor by assets, with almost $9 billion under management, according to IndexUniverse’s latest daily ETF League Table. Among its more successful funds are the $703.8 million First Trust Dow Jones Internet Fund (NYSEArca: FDN).
Smart beta isn’t smarter than cap weighting, but it is different, and that’s great for investors.
Trial by fire is one way to discover why ETF transparency matters.
Most people now realize leveraged ETFs can hurt you, but how, then, to use them?
What would a shift out of a mutual fund and into an ETF look like up close?