Wed, 13/02/2013 - 10:13
First Trust Advisors has launched an actively managed exchange-traded fund, the First Trust Preferred Securities and Income ETF.
The fund seeks total return and to provide current income by investing primarily in preferred securities and income-producing debt securities, including corporate bonds, high-yield securities and convertible securities.
Under normal market conditions, at least 80 per cent of the fund’s net assets, including investment borrowings, will be allocated to these asset classes.
Stonebridge Advisors, a Wilton, Connecticut-based Registered Investment Advisor, serves as the fund’s sub-advisor and manages its portfolio. Stonebridge provides expertise in preferred and hybrid securities for institutional investors and high-net-worth individuals.
Preferred securities are similar to corporate bonds in that they are sold on the basis of yield and pay a fixed or adjustable rate of return, but like equities, are traded on major exchanges. Most preferred and hybrid securities have call dates which are five or 10 years after their issuance dates, and therefore possess a call feature that shortens the effective duration of the longer-dated or perpetual securities. In the current low-interest-rate environment, preferred securities with shorter durations are attractive because they provide investors with relatively high levels of income but with less interest-rate sensitivity.
“We believe that preferred securities are an important component of a well-diversified portfolio. This fund’s structure as an actively managed ETF gives us the opportunity to manage the fund not only to seek income and total return, but to react to market conditions and work to safeguard capital during changes in the market, especially if interest rates start to rise,” says Scott Fleming, president and chief investment officer of Stonebridge. “We believe our conservative investment approach is the best way to provide the potential for superior investment results for our clients.”
First Trust and Stonebridge believe preferred securities have the potential to enhance an investor’s overall return, deliver meaningful diversification and decrease portfolio volatility because the historical correlations of preferred securities to other asset classes have been low. Preferred securities have also historically proven to be a more reliable source of income than common stocks as they are senior in the capital structure and have produced a more stable stream of income.
In addition, since preferred securities’ yields could be higher than those of other investment-grade products, they may be able to produce a high stream of income without incurring significantly more risk.
“With the current opportunity in the preferred securities space, the Fund may allow investors to potentially earn high yields while mitigating risk in various market environments,” says Robert Carey, chief market strategist of First Trust. “By focusing on market inefficiencies, along with the fund’s active management style, the portfolio managers can potentially provide a way for investors to seek attractive returns and diversified exposure to income-producing preferred securities.”
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