First Trust expands line-up with two short duration municipal bond ETFs

Nov 5th, 2018 | By | Category: Fixed Income

First Trust Advisors has launched two new actively managed ETFs on NYSE Arca, targeting the short-duration end of the yield curve within the municipal bond market.

First Trust expands line-up with two short duration municipal bond ETFs

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

The First Trust Short Duration Managed Municipal ETF (FSMB US) and the First Trust Ultra Short Duration Municipal ETF (FUMB US) are aimed at investors seeking federally tax-exempt income who may be concerned over the negative impact of future interest rate increases on bond prices.

“Even as interest rates have moved higher this year, investor demand for tax-free income from municipal bonds continues to stand out,” said Ryan Issakainen, Senior Vice President, ETF Strategist at First Trust.

FSMB will seek to maintain a weighted average duration of one to three years while FUMB will target an average duration of less than one year.

A weighted average duration of two years, for example, implies the portfolio will lose 2% of its value for a one-off, instantaneous 1% increase in yields, ignoring the effects of convexity.

The funds are managed by First Trust using a strategy that focuses on a combination of quantitative analysis and fundamental research. The funds can investing in various types of municipal securities (general obligation bonds, lease obligations, revenue bonds, notes, cash equivalents etc) as long as they have been issued in US dollars.

While the funds target primarily investment grade bonds, up to 35% of FSMB’s portfolio and 20% of FUMB’s portfolio can be invested in high yield issues.

The funds’ managers will select securities they believe will perform well on a total return basis in various interest rate environments, focusing on bonds that meet basic infrastructure needs or provide critical services within their communities. Each fund will be diversified across at least ten different issuers with an emphasis on states with growing populations and healthy employment trends.

Active portfolio management allows the funds’ managers to make portfolio adjustments as conditions change.

“Our experienced municipal securities team at First Trust employs a rigorous, disciplined approach to managing risk, while seeking to capitalize on yield curve, industry weightings, and individual credit opportunities,” said Issakainen.

FSMB comes with a net expense ratio of 0.45% due to a contractual fee waiver in place until at least November 2020. Its gross expense ratio is 0.55%. FUMB has a net expense ratio of 0.35% and a gross expense ratio of 0.45%.

The municipal bond market has been a busy space for ETF issuers in recent months with new products from Columbia Threadneedle and JP Morgan.

The JPM product, the JPMorgan Ultra-Short Municipal ETF (JMST US), which is listed on Cboe BZX, is a potential alternative to FUMB, offering actively managed exposure to ultra-short municipal bonds at a fee of 0.18% pa, almost half that of the First Trust fund.

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