First Trust adds two new active fixed income ETFs

Mar 6th, 2024 | By | Category: Fixed Income

First Trust has launched two new actively managed fixed income ETFs in the US investing in commercial mortgage-backed securities (CMBS) and structured credit.

Ryan Issakainen, Senior Vice President, ETF Strategist at First Trust.

Ryan Issakainen, Senior Vice President, ETF Strategist at First Trust.

The First Trust Commercial Mortgage Opportunities ETF (CAAA US) and First Trust Structured Credit Income Opportunities ETF (SCIO US) have been listed on NYSE Arca with expense ratios of 0.55% and 0.95%, respectively.

The funds are managed by First Trust’s Government & Securitized Products Group which is co-headed by Senior Portfolio Managers Jim Snyder and Jeremiah Charles who, alongside Owen Aronson, serve as portfolio managers for the funds.

Together, the team has over 100 years of investment experience managing retail and institutional real estate and mortgage-related assets and portfolios. They believe government and securitized assets may offer the potential to generate high-quality, attractive income.

Ryan Issakainen, Senior Vice President and ETF Strategist at First Trust, commented: “We are excited to expand our line-up of actively managed fixed income ETFs with the launch of these two funds, both of which provide exposure to assets that non-institutional investors have historically neglected.”

Commercial MBS

CAAA seeks to maximize long-term total return by investing in high-quality CMBS which are collateralized by pools of mortgages on commercial and multi-family properties. In addition to traditional non-agency CMBS, the fund may invest in restricted CMBS and interest or principal-only CMBS.

At least 90% of the ETF’s allocation will be allocated to CMBS with ‘AAA’ credit ratings. The portfolio’s weighted average duration will be managed within two years of the benchmark Bloomberg Non-Agency Investment Grade CMBS: US Aggregate Eligible Aaa Index, which was 3.81 years as of the end of 2023.

Securities are selected for the portfolio based on a relative value approach that harnesses both quantitative and qualitative assessments.

Owen Aronson, Portfolio Manager at First Trust, commented: “Investors looking for fundamentally different sources of competitive, high-quality income can now look to CAAA. With CAAA’s expectation to own a portfolio of 90% AAA CMBS, the strategy accesses income from a sector more heavily owned by banks and institutional investors: commercial mortgages. Undoubtedly the commercial real estate sector is undergoing an evolution that is not without concern. We believe that by coupling AAA CMBS that have a senior claim on already senior commercial mortgages with active portfolio management, the fund presents a compelling solution.”

Structured credit

SCIO aims to optimize long-term income by investing in a range of structured credit instruments including residential and commercial MBS, up to a maximum 50% portfolio weight, alongside collateralized loan obligations, asset-backed securities, and to-be-announced transactions.

The fund will invest no more than 60% of its assets in securities with high yield credit ratings and will manage its weighted average portfolio duration within -1 to +6 years.

Jeremiah Charles, co-Head of the First Trust Government and Securitized Products Group, said: “As we continue to round out First Trust’s actively managed fixed income ETF lineup, we are so excited to offer investors a compelling solution in the structured credit market with SCIO. Investors will have access to the types of opportunistic yields long held by the private fund markets. First Trust’s deep bench of talent, record of success in the space, and disciplined approach to risk management make SCIO a compelling solution for well-diversified portfolios.”

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