First Trust Advisors L.P. (“First Trust”), a leading ETF provider and asset manager, expects to launch two actively managed exchange-traded funds (“ETFs”), the First Trust Emerging Markets Local Currency Bond ETF (NASDAQ: FEMB) and the First Trust Low Duration Mortgage Opportunities ETF (NASDAQ: LMBS). The new funds are expected to begin trading on The NASDAQ Stock Market on November 5, 2014.
The First Trust Emerging Markets Local Currency Bond ETF seeks maximum total return and current income. The fund invests in bonds, notes and bills issued or guaranteed by entities in emerging market (EM) countries that are denominated in the issuer’s local currency. The risk/return profile of EM local currency bonds is driven mainly by two components, local interest rates and foreign exchange (FX) fluctuations, which can be a significant driver of performance, either positive or negative. The fund will seek to provide the potential to benefit from both sources of return by actively managing the bond portfolio, while dynamically hedging (offsetting) the associated currency risk by adjusting hedge positions according to the market environment.
The First Trust Low Duration Mortgage Opportunities ETF primarily seeks to generate current income with a secondary objective of capital appreciation. Under normal market conditions, the fund will seek to achieve its investment objectives by investing at least 80% of its net assets (including investment borrowings) in investment grade, mortgage-related debt securities and other mortgage-related instruments tied to residential and commercial mortgages. The fund targets high asset credit quality with at least 60% of assets invested in the government-sponsored mortgage sector. The fund will seek to provide an attractive level of income while maintaining an effective duration target of three years or less. A focus on managing and limiting the average portfolio duration may help to limit price sensitivity. The portfolio managers believe thorough and continuous monitoring of overall housing market fundamentals, quantitative portfolio modeling, and the ability to rebalance the portfolio to stay within the fund’s three-year duration target is critical to achieving higher risk-adjusted returns.
Traditionally, fixed income ETFs that follow a market-cap weighted indexing approach typically invest a higher percentage of the fund’s assets in the most indebted issuers within the index, exposing investors to potentially overvalued or poorly structured market sectors. “These funds provide a strategy for investors to gain exposure to two fixed income sectors in which we believe in-depth research and analysis, along with ongoing surveillance, can add significant value for investors,” said Ryan Issakainen, CFA, Senior Vice President and ETF Strategist at First Trust. “Both funds may benefit from active portfolio management, which provides the flexibility to implement specific views, while targeting a more attractive tradeoff between risk and return.”
The First Trust Emerging Markets Local Currency Bond ETF will be actively managed by First Trust Global Portfolios Ltd., the sub-advisor to the fund. Derek Fulton, Chief Executive Officer, and Leonardo Da Costa, Portfolio Manager, both of First Trust Global Portfolios Ltd. will serve as the portfolio managers of the fund.
The First Trust Low Duration Mortgage Opportunities ETF will be actively managed by First Trust Advisors L.P. Day-to-day management decisions are primarily made by Jim Snyder and Jeremiah Charles, Portfolio Managers and members of the First Trust Mortgage Securities Team.
For more information about First Trust, please contact Ryan Issakainen of First Trust at (630) 765-8689 or RIssakainen@FTAdvisors.com.
About First Trust
First Trust Advisors L.P., along with its affiliate First Trust Portfolios L.P., are privately-held companies which provide a variety of investment services, including asset management and financial advisory services, with collective assets under management or supervision of approximately $99 billion as of September 30, 2014 through unit investment trusts, exchange-traded funds, closed-end funds, mutual funds and separate managed accounts. First Trust is based in Wheaton, Illinois. For more information, visit http://www.ftportfolios.com.
You should consider each fund’s investment objectives, risks, and charges and expenses carefully before investing. Contact First Trust Portfolios L.P. at 1-800-621-1675 to obtain a prospectus or summary prospectus which contains this and other information about the funds. The prospectus or summary prospectus should be read carefully before investing.
ETF Characteristics
The funds will list and principally trade their shares on The NASDAQ Stock Market LLC.
Investors buying or selling fund shares on the secondary market may incur customary brokerage commissions. Market prices may differ to some degree from the net asset value of the shares. Investors who sell fund shares may receive less than the share’s net asset value. Shares may be sold throughout the day on the exchange through any brokerage account. However, unlike mutual funds, shares may only be redeemed directly from the funds by authorized participants, in very large creation/redemption units.
Risk Considerations
The funds’ shares will change in value, and you could lose money by investing in the funds. One of the principal risks of investing in the funds is market risk. Market risk is the risk that a particular security owned by the funds, fund shares or securities in general may fall in value. The funds are subject to management risk because they are actively managed portfolios. In managing the funds’ investment portfolios, the advisor or sub-advisor will apply investment techniques and risk analyses that may not have the desired result. There can be no guarantee that the funds will meet their investment objectives.
FEMB is subject to sovereign debt risk which involve special risks because the governmental authority that controls the repayment of the debt may be unwilling or unable to repay the principal and/or interest when due. In times of economic uncertainty, the prices of these securities may be more volatile than those of corporate debt obligations or of other government debt obligations.
FEMB and LMBS are subject to high-yield security risk. High-yield securities, or “junk” bonds, are subject to greater market fluctuations and risk of loss than securities with higher ratings, and therefore, may be highly speculative. These securities are issued by companies that may have limited operating history, narrowly focused operations, and/or other impediments to the timely payment of periodic interest and principal at maturity.
FEMB and LMBS are subject to illiquid securities risk which involves the risk that the securities will not be able to be sold at the time desired by a fund or at prices approximately the value at which a fund is carrying the securities on its books.
FEMB and LMBS are subject to credit risk, income risk and interest rate risk. Credit risk is the risk that an issuer of a security will be unable or unwilling to make dividend, interest and/or principal payments when due and that the value of a security may decline as a result. Income risk is the risk that income from the fund’s fixed-income investments could decline during periods of falling interest rates. Interest rate risk is the risk that the value of the fixed-income securities in a fund will decline because of rising market interest rates. FEMB is subject to call risk which is the risk that if an issuer calls higher-yielding debt instruments held by the fund, performance could be adversely impacted. LMBS is subject to prepayment risk which is the risk that the fund may not be able to reinvest proceeds received on terms as favorable as the prepaid security.
Mortgage-related securities, including mortgage-backed securities, in which LMBS may invest, are more susceptible to adverse economic, political or regulatory events that affect the value of real estate. Mortgage-related securities are subject to the risk that the rate of mortgage prepayments decreases, which extends the average life of a security and increases the interest rate exposure.
Securities issued or guaranteed by federal agencies and U.S. government sponsored instrumentalities, in which LMBS may invest, may or may not be backed by the full faith and credit of the U.S. government.
If a counterparty defaults on its payment obligations, LMBS will lose money and the value of fund shares may decrease. LMBS’s investment in repurchase agreements may be subject to market and credit risk with respect to the collateral securing the agreements.
FEMB invests in securities of non-U.S. issuers and is subject to additional risks, including currency fluctuations, political risks, withholding, the lack of adequate financial information, and exchange control restrictions impacting non-U.S. issuers. These risks may be heightened for securities of companies located in, or with significant operations in, emerging market countries. Because FEMB’s net asset value is determined on the basis of U.S. dollars and the fund invests in non-U.S. dollar denominated securities, you may lose money if the local currency of a foreign market depreciates against the U.S. dollar. Holders of global depositary notes may have limited rights, and investment restrictions in certain countries may adversely impact their value.
The funds may effect a portion of creations and redemptions for cash rather than in-kind securities. As a result, the funds may be less tax-efficient.
The funds currently have fewer assets than larger funds, and like other relatively new funds, large inflows and outflows may impact the funds’ market exposure for limited periods of time.
FEMB and LMBS are subject to derivatives risk. The use of derivative instruments can lead to losses because of adverse movements in the price or value of the underlying asset, index or rate, which may be magnified by certain features of the derivatives. These risks are heightened when the funds’ portfolio managers use derivatives to enhance the funds’ return or as a substitute for a position or security, rather than solely to hedge (or offset) the risk of a position or security held by the funds.
LMBS is subject to short sales risk. Shorting may result in greater gains or greater losses. Short selling creates special risks which could result in increased volatility of returns. Because losses on short sales arise from increases in the value of the security sold short, such losses are theoretically unlimited.
The funds are classified as “non-diversified” and may invest a relatively high percentage of their assets in a limited number of issuers. As a result, the funds may be more susceptible to a single adverse economic or regulatory occurrence affecting one or more of these issuers, experience increased volatility and be highly concentrated in certain issuers.
Duration is a measure of a bond's sensitivity to interest rate changes that reflects the change in a bond's price given a change in yield.
Contacts:
Ryan Issakainen
(630) 765-8689
RIssakainen@FTAdvisors.com
