First Trust Advisors has launched the First Trust Municipal High Income ETF (Nasdaq: FMHI), a new actively managed fund investing primarily in municipal debt securities. The ETF seeks to provide a high level of tax-exempt income with a secondary objective of long-term capital appreciation.

The fund focuses on enhancing income by investing in non-rated bonds, lower investment-grade bonds and high yield municipal bonds.

To manage the fund, First Trust will rely on a combination of quantitative analysis and fundamental research. In seeking attractive income, the fund will focus on non-rated bonds, lower investment-grade bonds and high-yield municipal bonds.

According to First Trust, federal and state tax increases implemented in recent years, coupled with favourable historical risk-adjusted total returns, have boosted the demand for tax-exempt investments. At the same time, some municipalities have faced increasing economic challenges, which has raised the importance of active credit analysis and municipal bond expertise.

The firm notes that while index-based ETFs may simply rely on rating agencies for credit analysis, a key benefit of active management is to make portfolio adjustments immediately as conditions change.

Ryan Issakainen, senior vice president, ETF strategist at First Trust, commented: “Our experienced municipal securities team at First Trust employs a rigorous, disciplined approach to managing risk, while seeking to capitalize on opportunities. Investor demand for tax-free income continues to grow, even as interest rates remain stubbornly low. For investors willing to take additional credit risk in pursuit of higher levels of tax-free income, we believe that active management is paramount.”

The municipal securities team at First Trust sees ample opportunities in municipal bonds. In their view, credit fundamentals are improving for many municipal bond issuers and taxable equivalent yields are attractive relative to other fixed income asset classes. Given the rising interest rate environment as a result of stronger economic growth, they have chosen to position the fund along the intermediate portion of the yield curve to provide less interest rate sensitivity than longer duration portfolios.

Johnathan N. Wilhelm, senior vice president, and Tom Futrell, senior vice president at First Trust, will serve as senior portfolio managers of the fund.

FMHI has a total expense ratio (TER) of 0.55% due to a contractual fee waiver in place until 26 October 2019. The fund’s gross expense ratio is 0.70%.