More investors have zeroed in on various yield-generating options as an alternative route to the low interest rates in Treasury bonds. Exchange traded fund investors now have another option with First Trust’s new actively managed preferred- and income-themed ETF.
According to a press release, the First Trust Preferred Securities and Income (FPE) began trading Tuesday, Feb. 12. FPE tries to generate income through holding preferred securities and income-producing debt securities, such as corporate bonds, high-yield securities and convertibles. The fund has a 0.85% expense ratio. [Preferred Stock ETFs Yielding 6% Still Chugging Along]
Specifically, the active ETF will hold senior notes, “baby bonds” – bonds issued in small denominations, trust preferred securities, newer hybrid structures, DRD preferreds, REIT preferreds and QDI preferreds.
Preferred securities have a higher seniority to common stocks in distribution payments and in case of liquidation of the company’s assets. However, they are junior to the company’s debt. Issuing companies typically have to pay all dividends on its preferred securities before earnings are dived out to common stockholders.
According to a First Trust research note, preferreds are an attractive source of income, with the BofA Merrill Lynch Fixed Rate Preferred Securities Index yielding an average 7.3% for the 10-year period ended January 31, 2013, compared to investment corporate debt with an average yield of 5.0%.
Stonebridge Advisors LLC serves as FPE’s sub-advisor and manages the portfolio.
“We believe that preferred securities are an important component of a well-diversified portfolio,” Scott Fleming, President and Chief Investment Officer of Stonebridge, said in the press release. “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.”
Specifically, their disciplined approach promises to factor in relative yield, credit quality, capital structure, liquidity, market conditions, interest rate environment, credit ratings, credit fundamentals and security characteristics.
For more information on new product launches, visit our new ETFs category.
Max Chen contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.