First Trust Plans Active Long-Short Junk ETF
October 15, 2012
First Trust, the Wheaton, Ill.-based money management firm known in part for its successful Internet-focused ETF, filed regulatory paperwork to market an actively managed long/short exchange-traded fund focused on high-yield, mostly U.S., corporate debt.
The First Trust High Yield Long/Short ETF will hew to a 130/30 approach to managing its long/short balance, meaning up to 130 percent of the fund’s managed assets may be long and the ETF’s short positions can total 30 percent of its managed assets, according to the prospectus dated Oct. 11.
First Trust said the fund will invest in securities rated below investment grade at the time of their purchase, including U.S. and non-U.S. corporate debt obligations, bank loans and convertible bonds. It said fund managers will consider securities with the lowest available ratings, and that the ETF will normally invest up to 10 percent of its assets in non-U.S. securities that aren’t denominated in dollars.
To mitigate the difficulty of finding available securities to short-sell in relatively illiquid high-yield corporate debt markets, the company said the pool of securities it will short will include U.S. Treasurys and corporate debt that can have investment-grade or noninvestment-grade ratings.
The ETF will use proceeds from its short positions to purchase high-yield debt securities, thereby creating a form of financial leverage, according to the filing.
The fund reflects the increasingly creative ways money management firms are addressing investors’ need for income in their portfolios. With interest rates pinned near zero by the Federal Reserve since the crash of 2008, conventional income-producing securities such as aggregate bond funds are shooting off paltry yields, and investors appear to be open to alternatives, including active ones.
For example, the Pimco Total Return ETF (NYSEArca: BOND) managed by Bill Gross has gathered more than $3 billion in assets in just seven months, and Gross himself has pitched his ETF as a sensible alternative to popular core indexed bond funds in the market, such as the iShares Barclays Aggregate Bond Fund (NYSEArca: AGG) and the Vanguard Total Bond Market ETF (NYSEArca: BND).
In its paperwork, First Trust didn’t include a proposed ticker for the First Trust High Yield Long/Short ETF, and it didn’t say what the annual expense ratio would be. But the company did leave open the door to possibly charging 12b-1 fees of up to 0.25 percent a year to offset costs of marketing the ETF.
First Trust, the No. 9 U.S. ETF firm by assets, has just over $8 billion in exchange-traded fund assets, according to data compiled by IndexUniverse. One of its most successful ETFs, the First Trust Dow Jones Internet Fund (NYSEArca: FDN), has $475 million in assets.
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