The Federal Reserve raised interest rates four times last year, stoking billions of dollars of inflows to short and ultra-short duration bonds and the related exchange traded funds.
At least one new ETF is looking to tap into investors' affinity for low duration fixed income exposure.
The First Trust Low Duration Strategic Focus ETF (NASDAQ: LDSF) debuted on Friday, marking the launch of 2019's first new ETF. The latest fixed income ETF from Illinois-based First Trust is actively managed and uses the increasingly prominent ETF of ETFs strategy.
LDSF “seeks to generate current income, with a secondary objective of preservation of capital,” according to a First Trust statement. “The fund seeks to achieve these objectives by allocating primarily among First Trust ETFs, but may also include other ETFs representing various asset classes, aimed at providing diversification benefits and less interest rate sensitivity when compared to traditional core fixed income benchmarks over time.”
Why It's Important
As an actively managed using the ETF of ETFs strategy, LDSF offers investors exposure to an array of fixed income segments, including but not limited to bank loans, emerging markets bonds, high-yield corporates and U.S. government debt.
While short-duration bonds were in style last year, bolstered by the Fed's four rate hikes, Fed fund futures currently price in expectations for zero interest rate increases this year. If the Fed slows its pace of rate hikes or stops altogether, bond investors could be compelled to take on more interest rate risk in search of additional income.
LDSF uses credit analysis and disciplined portfolio construction to identify compelling fixed income opportunities.
The new ETF's holdings currently include the First Trust Low Duration Opportunities ETF (NASDAQ: LMBS), First Trust Senior Loan Fund (NASDAQ: FTSL) and the First Trust Enhanced Short Maturity ETF (NASDAQ: FTSM). Those three First Trust ETFs combine for over 87 percent of LDSF's roster.
LDSF aims to have a portfolio duration of three years or less. The new ETF charges 0.86 percent per year, or $86 on a $10,000 investment.
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