First Trust launches first active FX ETF in Europe

Aug 1st, 2017 | By | Category: Alternatives / Multi-Asset

First Trust Global Portfolios has launched the First Trust FactorFX UCITS ETF (LON: FTFX), the first actively managed foreign exchange (FX) ETF in Europe.

Currency Trading

FTFX will typically hold between 20 and 30 currency pairs across both developed and emerging markets.

FTFX will hold a basket of between 20 to 30 currency pairs in developing and emerging markets through forward FX contracts, futures, money market instruments and short-dated sovereign debt.

The ETF will primarily seek to earn alpha through the implementation of multiple carry trades, which are strategies that seek to capitalise on the interest rate differential between various currencies. It is typically administered by selling short a low yielding currency and using the proceeds to invest in higher yielding currencies, thereby earning a positive interest rate differential.

FTFX applies two risk premia – value and momentum – to the carry trade in currency markets. It goes long on undervalued currencies and higher-yielding currencies, and goes short on overvalued, lower-yielding currencies. It also seeks exposure to currencies displaying positive momentum and avoids negative momentum currencies.

“Currency is an asset class, and an extremely liquid one,” said portfolio manager Leonardo DaCosta. “By focusing on the yield differential of currency pairs, the fund can potentially generate total returns in a world of compressed yields, and is a great way to add portfolio diversification.”

First Trust believes the fund may appeal to yield-hungry investors seeking to navigate an environment of persistently low interest rates – the yield on the Barclay’s Global Aggregate Index has reduced from 4.2% to 1.5% over ten years to the end of March 2017.

“Fixed income investors have reached for yield by extending duration and credit risk. International fixed income investing offers investors another route to higher yields but has historically been associated with higher volatility. Our new fund offers investors a way to capture international yield differentials while potentially managing currency volatility without taking on credit or duration risk,” explained Derek Fulton, CEO of First Trust Global Portfolios. “Currencies also tend to have low correlation to bonds and equities.”

Fulton continued: “We are delighted to be bringing to market our first actively managed UCITS ETF. We have always believed in the principles of active management, but our philosophy has been to establish a non-discretionary, systematic and rules-based approach and this quantitative investment strategy has proved popular across our product range.   We are thrilled to be able to bring this active approach to the asset class of currency markets”.

According To First Trust, the ETF is targeted at wealth managers, DFMs, advisers and institutional investors. It will be managed by members of the investment team at First Trust Global Portfolios, Leonardo Da Costa, a portfolio manager at First Trust and fixed income and emerging specialist and Anthony Beevers, a portfolio manager and quantitative strategies specialist.

The fund may serve as a satellite holding within an investor’s overall portfolio to increase diversification and enhance income. The ETF is denominated in US dollars, has a total expense ratio (TER) of 0.75% and is available for investors to trade from 1 August 2017.

To gauge performance, the fund will be benchmarked against the JP Morgan G10 FX Carry Strategy Index. Based on a universe of G-10 currencies, this index strategy goes long the three currencies (versus the dollar) with the highest short-term interest rates and shorts the three currencies (versus the dollar) with the lowest short-term interest rates.

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