First Trust Plans Multi-Asset Income ETF

July 16, 2012

First Trust adds a second multi-asset income-focused ETF to its product pipeline.

First Trust, the Wheaton, Ill.-based fund provider known for its Internet ETF, filed paperwork with U.S. regulators to market an actively managed global asset allocation ETF that serves up total return and income potential.

The filing follows separate paperwork the company submitted to regulators that also detailed a multi-asset income index fund, and it’s unclear whether the new proposed ETF, the First Trust Global Tactical Asset Allocation and Income Fund, would replace that original strategy—an index fund—already in the regulatory pipeline or join it.

The latest is a fund-of-funds that will invest in other ETFs and ETNs tapping into various asset classes globally while relying on diversification and regular rebalancing to keep the portfolio’s risk profile stable, the company said in its latest filing. The strategy also adds an options overlay to enhance income potential by selling calls on a portion of the holdings and supplement their yields.

At the end of the day, it’s clear that the Illinois-based fund provider is looking for ways to tap into what has been strong investor demand for income-generating funds as they look for opportunities beyond stock dividends and bond coupons in an interest-rate-starved environment.

Many companies have jumped onto the income ETF bandwagon recently, and multi-asset strategies have been particularly popular lately. Companies like Arrow, iShares and State Street Global Advisors are some of the names that have launched multi-asset income ETFs so far this year, as IndexUniverse analyst Paul Britt recently explored in a blog.

SSgA’s recently launched SPDR SSgA Income Allocation ETF (NYSEArca: INKM) is of particular relevance here because, unlike most other ETFs in the space, it, too, is actively managed.

INKM has gathered $9 million in assets since it came to market on April 25. The fund costs an annual expense ratio of 0.70 percent.

Options Overlay

In the filing it submitted to the Securities and Exchange Commission, First Trust said that it looks to keep the portfolio’s risk profile stable through diversification and regular rebalancing.

Still, it noted that the options element of the strategy would add another layer of risk, something investors should keep in mind.

Just how much “overwrite” investors should expect to see will depend on market conditions and “the composition of the underlying period,” First Trust said in the filing, referring to the purchase of call options.

“However, the overwrite percentages on each individual security will be approximately pro-rata with the other securities that have liquid available options market,” First Trust noted in the filing.

The options sold will have, generally, a maturity of less than 180 days and be at-the-money or slightly out-of-money, the company added.

The filing didn’t disclose a planned ticker or fees, something that suggests a launch could still be months away.


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