Long-tenured managers lead the First Trust Preferred Securities and Income ETF FPE, but a relaxed approach to limiting risk leaves the process wanting. The strategy earns a Morningstar Medalist Rating of Neutral.

This strategy—one of a few under Stonebridge Advisors (a subadvisor to First Trust), an asset manager that specializes in preferred and hybrid securities—is run by four managers whose diverse experience includes trading, portfolio management, credit research, and analytical tool development. Many of them have been with the firm since before this exchange-traded fund's inception, but their long tenure hasn't translated into greater dedicated investment in this fund or its institutional-focused sibling fund. A small supporting cast rounds out the team.

The team's process blends macro and fundamental analysis with screening tools to find issues with attractive credit traits and structures. Efforts to refine data fields and tools are intended to improve analysis, but security selection hasn't been consistently additive. The managers consider what they believe to be the salient risks in portfolio construction but don't set any explicit guardrails, adopting a rather relaxed attitude in managing those risks. Overall strategy execution has led to mixed results.

A focus on shorter duration and an emphasis on fixed-to-floating and fixed-to-variable rate securities led to relative outperformance in 2022 as the year saw multiple aggressive rate hikes, and the fund was a top-tercile performer in the preferred-stock Morningstar Category. Its retail sector exposure helped at the beginning of 2023 as that portion of the market rallied, but that wasn't enough to offset losses incurred elsewhere, such as those in the banking sector as repercussions from the banking crisis reverberated across the market. The fund's exposure to certain U.S. and European banks proved detrimental, and the year-to-date performance through April 2023 landed this fund in the bottom 12% of its category.

Such negative impact from the banking sector can be exaggerated for preferred-focused strategies, as banks and financial institutions make up the bulk of issuers of preferred securities, but that's why rigorous security selection and risk management are especially paramount. Over the history of this ETF, from March 2013 through April 2023, the fund's returns on a risk-adjusted basis (as measured by the Sharpe ratio) trail 60% of peers, and its spotty downside protection and below-average long-term record dent its appeal.

Analyst Rating

High on yield, low on industry diversification.

Analyst

Chiayi Tsui

SPDR Bloomberg 1-3 Month T-Bill ETF

JPMorgan Chase & Co

This research-driven approach benefits from efforts to be more systematic but hasn't led to any compelling results. Inconsistent downside protection and a relaxed approach to limiting risks warrant an Average Process rating.

The team uses a blend of macro, fundamental, and technical analysis to construct a portfolio that it believes mitigates downside risk and adds alpha. Macro views are developed based on an assessment of interest rates, yield curves, global economic trends, and the political and regulatory environment. The managers identify the main factors that will impact the portfolio and enact measures that should lessen those risks, but a somewhat casual approach lacks rigor in controlling risk.

Fundamental analysis ensures that all issues are approved from a credit standpoint before they become portfolio holdings. Technical analysis is employed to gauge liquidity and monitor flows and market supply and demand, and relative valuation is used to find superior security structures and features. Improvements from a tool perspective have supposedly made the process more systematic over time, and the team has continuously refined the data fields used in their analysis. Moreover, the recent hire of experienced senior analyst Jeff Bernstein should bolster the team's financials sector expertise, but results have been mixed, and the team hasn't been able to demonstrate particularly strong research chops or ability to withstand stressed environments.

Average

Process

The managers running this strategy have plenty of experience and there is good stability among their ranks, but the same can't be said for the supporting cast, and the alignment of interests with shareholders is lacking. The strategy earns an Average People Pillar.

Chief executive officer Scott Fleming is the figurehead here and has decades of experience investing in preferred securities, having previously run another preferred-securities-focused asset manager before founding Stonebridge in 2004. Three other individuals join him in managing this strategy: chief investment officer Robert Wolf, who has two decades of fixed-income experience in portfolio management and credit research; chief strategist Eric Weaver, who oversees the development of proprietary tools to facilitate trading and other parts of the investment process; and head of credit research Angelo Graci, who directs the firm's research efforts and brings preferred-specific sector knowledge. They receive support from one risk analyst, three traders, and three research analysts (one of whom is Fleming’s son).

While the managers bring tenure and experience to the table, their personal investment in this ETF remains low—in fact, two of them don't have anything invested. Moreover, preferred-specific experience among the supporting crew remains modest, and departures in the lower ranks have detracted from the overall tenure of the team, whose two newest members joined only in 2022.

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 Preferred Securities & Income ETF

FPE is an actively managed fund that attempts to generate income by investing globally in preferred equities and income producing debt across the market cap spectrum.

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WHEATON, Ill.--(BUSINESS WIRE)--First Trust Advisors L.P. ("FTA") announces the declaration of the monthly distributions for certain exchange-traded funds advised by FTA. The following dates apply to today's distribution declarations: Expected Ex-Dividend Date: April 23, 2024 Record Date: April 24, 2024 Payable Date: April 30, 2024 Ticker   Exchange   Fund Name   Frequency   Ordinary Income Per Share Amount   ACTIVELY MANAGED EXCHANGE-TRADED FUNDS   First Trust Exchange-Traded Fund III FCAL   N.

First Trust Advisors L.P. Announces Distributions for Exchange-Traded Funds

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News for First Trust Preferred Securities & Income ETF ETF (FPE)