First Trust Managed Muni ETF’s FMB experienced managers and researchers execute a straightforward process, and the strategy’s higher-than-peers’ non-investment-grade stakes differentiate it from rivals.

Municipal veterans Johnathan Wilhelm and Tom Byron comanage this exchange-traded fund and bring more than three decades of average industry experience. First Trust named Wilhelm a comanager in May 2014, while Byron joined about two years ago from BMO Global Asset Management to take over for the retiring Tom Futrell. The supporting cast is small but experienced. Six credit analysts, who average more than 25 years of industry experience, and a dedicated trader support the managers. When a veteran analyst left in 2022, the team worked quickly to backfill the role with an equally experienced researcher. First Trust is looking to expand the analyst team further. More research resources will help here, especially given the higher credit risk in the ETF.

The strategy employs an industry-standard methodology, blending top-down views with bottom-up fundamental analysis. Beginning with a proprietary total-return scenario analysis tool to gauge bond performance amid rising interest rates, collaboration is central to the approach. Regular engagement between comanagers Wilhelm and Byron, analysts, and traders via weekly meetings fosters effective security selection and credit surveillance. This process emphasizes higher-yielding securities, often not investment-grade, which contributes to the strategy’s elevated risk profile relative to peers. The ETF may hold up to 35% below-investment-grade debt, including nonrated, normally between 13% and 20% of assets. As of December 2023, the ETF held 13.8% (10.2% nonrated) of assets in paper rated BB and below. Healthcare issuers make up the ETF’s largest sector weighting at 16.6% of assets, primarily consisting of hospitals; however, the managers reduced the exposure to continuing care retirement communities because of credit concerns about maintaining capacity at these facilities in the wake of the pandemic.

These non-investment-grade stakes have helped the ETF to top-decile performance versus its national muni intermediate Morningstar Category peers since comanager Wilhelm joined the strategy in June 2014 (his first full month). Since then, the ETF’s 2.9% annualized return through February 2024 was about 60 basis points better than its median peer. However, investors should expect a bumpier than usual ride versus peers during credit-driven selloffs and outperform in normal periods.

Analyst Rating

A credit-focused intermediate municipal active ETF.

The portfolio’s higher risk profile differentiates it from its index and peers, driven by solid fundamental credit research; however, the approach does not stand out from rivals, warranting an Average Process rating.

This sensible process incorporates industry analysis, credit surveillance, and performance attribution analysis. First Trust’s proprietary total return analysis tool that reviews each bond’s characteristics and how it may perform in various scenarios makes up the process’ backbone. 

The team first screens the universe of bonds that often identifies higher-yielding issuers with income cushions that can provide insulation during rate-driven selloffs. Analysts then conduct due diligence on obligors that meet their criteria and assign internal credit and momentum ratings, indicating potential upgrades and downgrades. The team then gathers to debate an issuer’s merits. Finally, comanagers Johnathan Wilhelm and Tom Byron select bonds that offer appealing risk/reward characteristics. It is rare for the managers to purchase a bond if they don’t agree. 

Portfolio guidelines limit the ETF to 35% of assets in below-investment-grade bonds, including nonrated debt. It currently maintains approximately 14% in high-yield munis. In contrast, the Bloomberg Municipal 1-15 Year Index does not feature any below-investment-grade debt. To manage this risk, the team is selective when it adds to these names, emphasizing areas of analytical strength such as healthcare, education, and special assessment districts. The comanagers manage duration within plus or minus 10% of the benchmark; the ETF’s 5.4-year duration as of December 2023 was 0.2 year longer than its index's

Average

Process

Experienced muni managers and a seasoned analyst team make up a solid foundation, but a larger analyst team is appropriate given ETF’s higher than normal non-investment-grade stakes; it earns an Average People rating.

Muni veterans Johnathan Wilhelm and Tom Byron lead this effort. Wilhelm, named comanager in May 2014, brings more than three decades of industry experience. The relative newcomer to the firm in March 2022, Byron, has more than four decades of experience. 

Alongside the comanagers is a small, but experienced supporting cast. This includes a team of six credit analysts, who provide fundamental research on each of the ETF’s issuers and bring more than 25 years of average industry experience, and a dedicated municipal bond trader. When former analyst Allison Keller departed in 2023, the team hired an equally experienced analyst in Andrea McKeague, a 30-year muni credit veteran; she will primarily focus on general-obligation bonds, higher-quality utilities, and airports. The team is committed to expanding resources yet remains small relative to industry peers, especially given the significant credit risk inherent in its portfolios. 

Fund ownership, which demonstrates alignment with investors, could be better here; Wilhem has between $100,001 and $500,000 while Byron has between $10,001 and $50,000.

People

First Trust meets the industry standard for stewardship, but it could do more to align itself with investors. It earns an Average Parent rating.

This is a team-oriented organization that eschews star managers. While exchange-traded funds represent the bulk of the firm's assets, First Trust bypasses the competitive market for low-cost beta funds, instead opting for complex strategies with higher management fees. However, the firm's focus on ETFs for future product development underpins its commitment to tax efficiency and transparency. Some of its thematic strategies appear trendy, but it stands behind them and rarely liquidates funds. 

The firm is a private partnership, controlled by Jim Bowen, the CEO. Many senior managers are limited partners. This ownership structure helps the firm stay focused on the long term and promotes retention, which has been strong for the investment team. The firm has grown considerably over the past decade and is among the largest providers of actively managed ETFs, as well as unit investment trusts. As it has grown, the firm has expanded its investment team and beefed up its technology infrastructure.

First Trust's focus is on educating advisors and providing them solutions. This may benefit investors indirectly, but First Trust could do more to directly align with investors by cutting fees and limiting trendy strategies.

Parent

First Trust Managed Municipal ETF

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