First Trust Plans Active Preferred Stock ETF

September 26, 2011

First Trust joins growing list of preferred-share ETFs, but with an actively managed twist.

First Trust, the Wheaton, Ill.-based money management firm behind FDN, the $442 million Internet-focused fund, filed paperwork with the Securities and Exchange Commission to market an actively managed preferred stock ETF.

The First Trust Preferred Securities and Income ETF will normally hold 80 percent of its assets in preferred securities or others that are similar to preferred stock, the filing said. Preferred shares are like bonds with very long maturities. They tend to be relatively low on a given company’s capital structure, but they distribute their dividends before those of common shares, hence the name “preferred.”

While the prices of preferred securities are vulnerable to changes in the interest rate or inflation outlooks just as bonds are, investors value them because of their steady dividend payments. They’re not immune from the possibility of default, but such preferred distributions can seem like a sea of tranquility in volatile markets such as the ones that have prevailed over the past few months.

The U.S. ETF market for preferred shares is populated by at least five funds, according to IndexUniverse’s ETF Classification System. The largest by assets is the iShares S&P Preferred Stock Index Fund (NYSEArca: PFF), which has about $7 billion. PFF is followed by the PowerShares Financial Preferred Portfolio (NYSEArca: PGF) and the PowerShares Preferred Portfolio (NYSEArca: PGX), which have $1.44 billion and $1.37 billion in assets, respectively.

First Trust said about 25 percent of the planned ETF’s assets will come from financial companies, which may include banks, thrifts, brokerage firms, broker/dealers, investment banks, finance companies, real estate investment trusts (“REITs”) and companies involved in the insurance industry, according to the filing.

It will own investment-grade securities rated at least “BBB-” by Standard & Poor’s or “Baa3” by Moody’s, the filing said.

First Trust didn’t name the ticker or the fund’s annual expense ratio in the filing.

The firm’s First Trust Dow Jones Internet Fund (NYSEArca: FDN) is the company’s biggest. First Trust had $5.41 billion in assets as of Sept. 23, according to data compiled by IndexUniverse.

It ended August with almost $6 billion in assets, though it suffered outflows of $1.16 billion last month.

 

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