First Trust lists active low-duration factor-based global government bond ETF on LSE

Oct 8th, 2020 | By | Category: Fixed Income

First Trust has introduced its First Trust Low Duration Global Government Bond UCITS ETF (FGOV LN) to United Kingdom-based investors with the listing of a sterling-hedged share class on the London Stock Exchange.

First Trust lists active factor-based low-duration global governent bond ETF on LSE

Leonardo da Costa, CFA, Director and Portfolio Manager, First Trust Global Portfolios.

The actively managed factor-based fixed income ETF initially launched on Euronext Amsterdam (FSOV NA) in November 2019 and has since grown to almost $25 million in assets.

The fund aims to provide an attractive level of income relative to measures of global aggregate government bonds by exploiting carry and value factor premia present in sovereign bond markets while maintaining low levels of duration risk. It has a secondary objective of capital growth.

The fund seeks to identify and invest in the most attractive issuers and maturities based on relative yield and yield per unit of duration while using derivatives to isolate factor premia.

To facilitate this, the fund’s managers – Derek Fulton, CEO of First Trust Global Portfolios and Portfolio Manager, Leonardo da Costa, CFA, Director and Portfolio Manager, and Anthony Beevers, CFA, Portfolio Manager – have an essentially unconstrained mandate, being able to invest in any regulated market worldwide and any maturity segment so long as securities are rated investment grade at the time of purchase.

In a bid to mitigate the currency risk that comes with a truly global mandate, the fund makes use of derivatives to hedge out exchange-rate movements relative to the euro, the strategy’s base currency. This enables the fund to capitalize on the return and diversification opportunities that can be found in less-explored areas of the global market without assuming material additional volatility.

To maintain accordance with the low-duration objective, the fund deploys interest-rate futures to adjust the weighted-average duration of the portfolio to between two and four years. By synthetically calibrating duration, the fund can allocate to the most attractive points on a yield curve while maintaining a consistent target interest-rate exposure.

Major country contributors presently include Italy, Singapore, Poland, Denmark, Australia, Portugal, Mexico, Hungary, Spain and Peru. In terms of credit quality breakdown, AAA-rated issuers contribute around 35% of the fund, AA-rated issuers make up around 4%, A-rated issuers about 26%, and BBB-rated issuers about 32%. The top ten positions constitute 44% of the fund’s value. Duration risk is currently towards the upper end of its two-to-four-year target band.

Leonardo Da Costa, Portfolio Manager at First Trust Global Portfolios, said: “In this now protracted environment of flat yield curves and negative interest rates across many fixed income markets, a disciplined approach that comes from utilizing a rules-driven process becomes increasingly important. The fund targets its exposure towards the steepest yield curves in its universe of investment-grade sovereign fixed income securities where investors are better compensated for taking interest rate risk. The low duration target means the overall fund duration is maintained between two and four, positioning it to help investors increase diversification, decrease correlations and lower duration risk while avoiding some of the perils of this low or negative interest rate world.”

He added: “This actively managed, currency-hedged, factor-based ETF offers wealth managers access to real innovation in the fixed income space which, historically has been limited to the preserve of equity markets. In today’s markets, investors are searching for attractive, transparent solutions to access enhanced fixed income exposure. We have had significant interest in this strategy since launching it on the Euronext last year, and we are delighted to be bringing it to the London Stock Exchange.”

The fund comes with a total expense ratio of 0.45%. Income is distributed quarterly.

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