First Trust introduces actively managed long duration ETF

Jan 30th, 2019 | By | Category: Fixed Income

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First Trust Advisors has launched the First Trust Long Duration Opportunities ETF (LGOV US) on NYSE Arca.

First Trust introduces actively managed long duration ETF

The fund provides access to mortgage-backed securities issued by three agencies (Ginnie Mae, Fannie Mae, and Freddie Mac) backed by the US government.

The actively managed ETF seeks to generate current income while preserving capital by investing in investment-grade fixed income securities issued or guaranteed by the US government.

The fund will maintain a long-duration profile, targeting an average duration for the portfolio of more than eight years.

Due to heightened interest rate and equity market volatility, First Trust believes mortgage-backed securities (MBS) are an important piece of a diversified portfolio due to their positive credit quality trends and low correlation to other core asset classes.

The fund thus contains high exposure to a diverse range of MBS including residential and commercial MBS, stripped MBS, real estate mortgage investment conduits, and mortgage dollar rolls.

The ETF’s prospectus notes that the fund first conducts a top-down review of the MBS and Treasury fixed income sectors to determine sector weights based on their evaluation of market fundamentals. It then performs a bottom-up analysis of individual securities to determine in which sub-sectors the portfolio will be overweight, neutral, and underweight.

The fund may invest up to 20% of its assets in high yield debt and 20% in ‘other debt’ including privately issued, non-agency sponsored asset-backed and mortgage-related securities, futures contracts, options, swap agreements, cash, and cash equivalents. Additionally, up to 30% of portfolio assets may be assigned to short sale positions.

The fund’s holdings are evaluated on a systematic basis to monitor any changes in security and portfolio performance in addition to looking for meaningful changes in risk factors.

“This ETF will further expand First Trust’s robust line-up of actively-managed ETFs, providing investment advisors with a long duration strategy that complements our existing line-up of actively managed fixed income ETFs,” said Ryan Issakainen, Senior Vice President, ETF Strategist at First Trust.

The ETF comes with an expense ratio of 0.65%.

The fund follows shortly after the launch earlier this month of the First Trust Low Duration Strategic Focus ETF (LDSF US) on Nasdaq Exchange. This fund seeks opportunities on the short end of the yield curve.

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