WHEATON, Ill.--(BUSINESS WIRE)--First Trust Advisors L.P. (“First Trust”) has launched two new exchange-traded funds (“ETFs”) that invest primarily in closed-end funds (“CEFs”), the First Trust CEF Income Opportunity ETF (Nasdaq: FCEF), and the First Trust Municipal CEF Income Opportunity ETF (Nasdaq: MCEF). Both funds seek to provide income by investing primarily in CEFs. FCEF has a secondary objective of total return. Furthermore, MCEF invests primarily in CEFs that invest in municipal debt securities and will seek to provide income that is exempt from regular federal income tax. The funds are the first actively managed ETFs that invest in CEFs.
The funds invest in a broad range of CEFs, which First Trust believes have the potential to provide a more stable income stream than other managed investment products. The nature in which CEFs trade may present additional opportunities as CEF shares are not redeemable. Instead, they are bought and sold on the secondary market and their share prices generally fluctuate based on supply and demand. Because of this, CEFs can trade at a premium or a discount to their net asset value (“NAV”) and can offer potential investment opportunities. Additionally, CEFs maintain a relatively fixed pool of investment capital and are not subjected to potentially large cash inflows and outflows which can dilute distributions over time. However, stable income cannot be assured.
Because a CEF's share price can deviate from its NAV, First Trust believes it pays to have a specialist in the field monitoring these securities daily. As market conditions change, the funds have the flexibility to adjust portfolio holdings, attempting to take advantage of the inefficiencies and opportunities that are present in the CEF marketplace. “Advisors and their investors have been underserved when it comes to actively managed solutions in the closed-end fund space. We believe through our rigorous proprietary model and years of experience in the CEF space that we can provide advisors and their investors with a better overall experience,” said Ken Fincher, Senior Vice President at First Trust and the funds’ portfolio manager.
First Trust will serve as the advisor to the funds. As portfolio manager, Ken Fincher has responsibility for the day-to-day management of each fund’s investment portfolio.
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 August 31, 2016 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 a fund’s investment objectives, risks, and charges and expenses carefully before investing. Contact First Trust Portfolios L.P. at 1-800-621-1675 or visit www.ftportfolios.com to obtain a prospectus or summary prospectus which contains this and other information about a fund. The prospectus or summary prospectus should be read carefully before investing.
ETF Characteristics
The funds 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 a fund by authorized participants, in very large creation/redemption units. If a fund's authorized participants are unable to proceed with creation/redemption orders and no other authorized participant is able to step forward to create or redeem, fund shares may trade at a discount to a fund's net asset value and possibly face delisting.
Risks
A fund's shares will change in value and you could lose money by investing in a fund. The funds are subject to management risk because the advisor will apply investment techniques and risk analyses that may not have the desired result. There can be no assurance that a fund's investment objectives will be achieved.
The funds are subject to market risk. Market risk is the risk that a particular security owned by a fund or shares of a fund in general may fall in value.
An investment in these funds should be made with an understanding of the risks associated with an investment in a portfolio of closed-end funds which invest in common stocks and debt securities.
Because the shares of CEFs cannot be redeemed upon demand, shares of many CEFs will trade on exchanges at market prices rather than net asset value, which may cause the shares to trade at a price greater than NAV (premium) or less than NAV (discount). There can be no assurance that the market discount on shares of any CEF purchased by a fund will ever decrease or that when a fund seeks to sell shares of a CEF it can receive the NAV for those shares. A fund may also be exposed to higher volatility in the market due to indirect use of leverage through its investment in CEFs. CEFs may issue senior securities in an attempt to enhance returns.
An underlying fund may invest in small and/or mid-capitalization companies. Such companies may experience greater price volatility than larger, more established companies.
An investment in an underlying fund containing securities of non-U.S. issuers 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.
Certain underlying funds are subject to credit risk, call risk, income risk, interest rate risk, zero coupon bond risk and prepayment risk. Credit risk is the risk that an issuer of a security held by an underlying fund 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. Credit risk is heightened for senior loans and high-yield securities. Call risk is the risk that if an issuer calls higher-yielding debt instruments held by an underlying fund, performance could be adversely impacted. Income risk is the risk that income from an underlying 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 an underlying fund will decline because of rising market interest rates. Zero coupon bond risk is the risk that zero coupon bonds may be highly volatile as interest rates rise or fall because they do not pay interest on a current basis. Prepayment risk is the risk that during periods of falling interest rates, an issuer may exercise its right to pay principal on an obligation earlier than expected. This may result in a decline in an underlying fund’s income.
A fund may be subject to covered call risk which is the risk that an underlying fund will forgo, during an option’s life, the opportunity to profit from increases in the market value of the security covering the call option above the sum of the premium and the strike price of the call, but has retained the risk of loss should the price of the underlying security decline.
The use of options and other derivatives 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. If a counterparty defaults on its payment obligations, a fund will lose money and the value of fund shares may decrease.
The market values of convertible bonds tend to decline as interest rates increase and, conversely, to increase as interest rates decline. A convertible bond's market value also tends to reflect the market price of the common stock of the issuing company.
The value of commodities and commodity-linked instruments typically is based upon the price movements of a physical commodity or an economic variable linked to such price movements. The prices of commodities and commodities-linked instruments may fluctuate quickly and dramatically and may not correlate to price movements in other asset classes.
Senior loans are usually rated below investment grade but may also be unrated. As a result, the risks associated with these loans are similar to the risks of high yield fixed income instruments. High yield securities, or “junk” bonds, are subject to greater market fluctuations and risk of loss than securities with higher ratings.
Preferred securities combine some of the characteristics of both common stocks and bonds. Preferred securities are typically subordinated to bonds and other debt instruments in a company's capital structure, in terms of priority to corporate income, and therefore will be subject to greater credit risk than those debt instruments.
An underlying fund may invest in inverse floating rate securities which create effective leverage and thus, the value of the inverse floater will increase and decrease to a significantly greater extent. Custodial receipt trusts may issue inverse floater securities and if an underlying fund were to hold inverse floaters issued by custodial receipt trusts, the underlying fund would be subject to the risks of inverse floaters.
Certain of the underlying funds may invest in distressed securities and many distressed securities are illiquid or trade in low volumes and thus may be more difficult to value.
The risks of owning an ETF generally reflect the risks of owning the underlying securities, although lack of liquidity in an ETF could result in it being more volatile and ETFs have management fees that increase their costs.
Illiquid securities involve 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.
Master limited partnerships (MLPs) are subject to certain risks, including price and supply fluctuations caused by international politics, energy conservation, taxes, price controls, and other regulatory policies of various governments. In addition, there is the risk that a MLP could be taxed as a corporation, resulting in decreased returns from such MLP.
Certain of the fixed-income securities held by certain underlying funds may not have the benefit of covenants which could reduce the ability of the issuer to meet its payment obligations and might result in increased credit risk.
Municipal securities may be adversely affected by local political and economic conditions and developments. Municipal securities issuers may be unable to pay their obligations as they come due. Income from municipal bonds could be declared taxable because of, among other things, unfavorable changes in tax laws, adverse interpretations by the Internal Revenue Service or state tax authorities, or noncompliant conduct of a bond issuer. All or a portion of a fund's otherwise exempt-interest dividends may be taxable to those shareholders subject to the federal alternative minimum tax.
Participation interests in municipal leases pose special risks because many leases and contracts contain "non-appropriation" clauses that provide that the governmental issuer has no obligation to make future payments under the lease or contract unless money is appropriated for this purpose by the appropriate legislative body.
The funds currently intend to effect a significant portion of creations and redemptions for cash, rather than in-kind securities. As a result, the funds may be less tax-efficient.
Because a fund's NAV is determined on the basis of U.S. dollars and the funds invest in non-U.S. securities, you may lose money if the local currency of a non-U.S. market depreciates against the U.S. dollar.
The funds currently have fewer assets than larger funds, and like other relatively new funds, large inflows and outflows may impact the fund's market exposure for limited periods of time.
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.
A fund’s investment in CEFs is restricted by the Investment Company Act of 1940 and a fund’s associated exemptive relief which limits the amount of any single CEF that can be owned by a fund.
First Trust Advisors L.P. is the adviser to the funds. First Trust Advisors L.P. is an affiliate of First Trust Portfolios L.P., the funds’ distributor.
