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A Pair Of Short-Duration ETFs Launch

ETF Professor

First Trust, one of the fastest-growing issuers of exchange traded funds, added to its stable of fixed income funds last week with the debuts of the First Trust Short Duration Managed Municipal ETF (NYSE: FSMB) and the First Trust Ultra Short Duration Municipal ETF (NYSE: FUMB).

Both ETFs are actively managed.

What Happened

In recent weeks, some fixed-income ETFs with medium to longer durations have suffered outflows while investors have poured into short- and ultra-short duration funds.

“Even as interest rates have moved higher this year, investor demand for tax-free income from municipal bonds continues to stand out,” Ryan Issakainen, senior vice president and ETF strategist at First Trust, said in a statement.

The First Trust Short Duration Managed Municipal ETF aims for a weighted average duration of one to three years.

“The short duration focus of these funds seeks to reduce the impact of interest rate movements while maintaining current income, as short-term municipal bonds have historically been less sensitive to rising interest rates,” according to First Trust.

Why It's Important

The Federal Reserve has raised interest rates three times this year and expectations are in place for a fourth rate hike in December, prompting many bond investors to embrace shorter-duration bond funds.

Municipal bonds are are tax-exempt at the federal level and, in many cases, at the state and local levels. That tax-exempt status boosts the appeal of municipal bonds for investors anticipating large tax bills, particularly those in high-tax states like California and New York.

The First Trust Ultra Short Duration Municipal ETF is expected to have a duration of less than one year.

“The municipal securities team at First Trust sees ample investment opportunities in municipal bonds,” according to the issuer. “In their view, credit fundamentals are improving for many municipal bond issuers and taxable equivalent yields are attractive relative to other fixed-income asset classes.”

What's Next

With the debuts of FSMB and FUMB, Illinois-based First Trust offers six actively managed tax-exempt bond ETFs.

FUMB's annual fee is 0.35 percent, or $35 on a $10,000 investment, while FSMB charges 0.45 percent.

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