First Trust Senior Loan ETF’s straightforward approach is led by an experienced group of managers but comes with modest analytical support and some recent turnover.  It earns a Morningstar Medalist Rating of Neutral.
The core members of this strategy previously worked together at Morgan Stanley/Van Kampen, where they ran a variety of loan-based strategies. Team head Bill Housey joined First Trust in 2010 with five of his colleagues after Invesco acquired Morgan Stanley's retail asset-management business. Housey builds the portfolio alongside comanager Jeffrey Scott. The duo has worked together for nearly two decades and is supported by an 11-person cohort of analysts and traders. This team has grown recently, including five out of eight dedicated credit analysts who joined after March 2018, but has seen some turnover with the departure of two seasoned analysts and a senior trader in the last two years. 
The strategy employs fundamental bottom-up research that focuses on identifying attractively valued loans. Bank loans, typically issued as below-investment-grade debt, tend to be less liquid within the fixed-income universe as they are more cumbersome to trade. The team attempts to mitigate this risk by tilting the portfolio toward less-leveraged companies and larger deals while downplaying companies in cyclical industries and modestly underweighting CCC debt. As of March 2023, the strategy held roughly 6% in CCC and below rated credit, versus its typical bank-loan Morningstar Category peer’s 12% stake. In addition to investing in higher-quality loans, the team uses high-yield corporate bonds and cash as its liquidity levers. That said, at times strong inflows into this strategy have led to a cash drag on performance.
This cautious positioning relative to peers has helped the strategy hold ground during rocky environments, but the same has led to lagging performance in market rallies. For example, the strategy’s 4% gain in 2021’s strong environment lagged most peers, but its 0.4% loss amid the rate volatility and economic uncertainty of 2022 was better than two thirds of its peers.

Analyst Rating

Undistinguished bank-loan offering.

Analyst

Saraja Samant

The strategy’s fundamentally driven approach is sound, but it’s hard to pinpoint any obvious advantage over the competition, warranting an Average Process rating.
The strategy employs bottom-up research that focuses on identifying less leveraged companies with attractively valued loans. Each loan deal that comes to market is reviewed by a senior analyst, who evaluates cash flow metrics, stability of the collateral's value, covenants, and leverage levels to determine an overall risk score for the issue. This risk score is combined with a quantitatively derived return rating to create a composite score ranging from one (most attractive) to six (least attractive). The analysts also track trends in their sectors, including new issue pipelines, equity volatility, and overall market sentiment.
The managers use the analysts' credit scores to determine the appropriateness of a loan for the portfolio. They review the relative value between sectors, alongside the diversification needs and liquidity concerns of the portfolio, given that bank loans tend to be relatively less liquid than other debt instruments. To address the liquidity needs of the portfolio, the team focuses on higher-quality and larger loans, along with owning roughly 5%-10% of assets in high-yield corporate bonds and maintaining a modest allocation to cash. That said, at times strong inflows into this strategy have led to a cash drag on its performance.

Average

Process

The strategy benefits from an experienced portfolio management team, but the supporting cast remains modest and has seen some recent turnover. It earns an Average People rating. 
Bill Housey, lead manager on this strategy since its inception in 2013, joined First Trust after serving more than a decade as a leveraged-loan portfolio manager on the Van Kampen branded strategies at Morgan Stanley.  When Housey joined the firm in 2010, he brought over five colleagues, including comanager Jeffrey Scott, two senior analysts Scott Fries and Gregory Olsen, head trader Andy Rybak, and director of operations Ryan Kommers. 
Housey and Scott, who continue to hold research responsibilities, are supported by eight research analysts, one chief credit officer, and two dedicated traders. The team’s resources have grown recently, with five out of the eight dedicated analysts added after March 2018. This 13-person cohort averages 18 years of experience but has seen some turnover. In early 2021, Brian Kessler stepped up as the chief credit officer after his predecessor Orlando Purpura retired. While Purpura’s departure is a loss, Kessler worked closely with Purpura for more than a year before he retired to ensure a smooth transition. The team also lost a seasoned sector specialist Pete Fasone, who retired in March 2023 after a 37-year career. Fasone’s responsibilities are divided across the board, but his expertise will be missed. To add, the team also saw a churn in its traders; the managers hired Berk Kislal, an experienced trader, in 2022 to replace another senior trader who departed just after two years with the firm. While the team is sufficiently staffed, the recent turnover warrants caution.

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 Senior Loan Fund

FTSL holds senior floating rate bank loans from firms around the globe. The actively managed fund can hold up to 20% of assets in non-senior loans, including high-yield bonds and equities.

Invesco Senior Loan ETF

Eaton Vance Floating-Rate ETF

 SPDR Blackstone Senior Loan ETF

Morgan Stanley Investment Management's active senior loan ETF is a compelling offering in the current environment. Investors have increasingly looked to senior loan ETFs in recent history instead of high yield bonds.

MSIM's Active Senior Loan ETF Beats Competitors on Cost

First Trust Senior Loan Fund ETF is an exchange-traded fund that invests in leveraged loans. Despite rising interest rates, leveraged loans have delivered robust returns in the past year due to their floating-rate nature. The fund has gained over 6.5% since our last rating, with low volatility, and currently offers a 30-day SEC yield in excess of 8%.

FTSL: Not A Good Entry Point, But An Attractive Hold (Rating Downgrade)

When the Exchange conference starts on Monday, advisors will have a new active floating rate bond ETF to learn about. It's one that's backed by a firm with a rich heritage in the investment style.

Eaton Vance Loans Expertise to the ETF Market

Franklin Senior Loan ETF

Virtus Seix Senior Loan ETF

Amid the prospect of higher interest rates for a longer-than-expected period, investors are flocking to bank loan ETFs.

5 Bank Loan ETFs to Capitalize on Higher Rates

FTSL focuses on senior loans, offers a 7.0% dividend yield, and has low interest rate risk. The fund has above-average credit risk and an expense ratio of 0.86%. There are other senior loan ETFs with lower expense ratios and higher dividend yields, making FTSL a less attractive investment opportunity.

FTSL: Senior Loan ETF With Growing 7.0% Dividend Yield, Low Rate Risk

Senior loan ETFs can offer protection against rising interest rates.

An Introduction to Senior Loan ETFs

Investing in a bank loan ETF can offer a compelling yield while helping maintain defensive portfolio positioning. In the current environment, investors who want to generate as much yield as possible might look to bank loans instead of high yield bonds.

Invesco's Bank Loan ETF Offers High Yield, Outpaces Active Peers

The First Trust Senior Loan Fund is an actively managed ETF that primarily invests in first lien senior floating-rate bank loans, with a current yield of 8.4%. The fund has low market risk due to its floating rate nature and low duration, but it does carry credit risk, as market sell-offs can widen spreads on underlying loans. The transition from LIBOR to SOFR in the leveraged loan market has been slow, potentially leading to higher yields for FTSL if issuers have to start paying an Alternative Base Rate.

FTSL: Unleveraged Floating Rate Loans, 8.4% Yield

Leveraged loan defaults are heading for the third-worst year in history as Federal Reserve interest rate hikes take a toll, according to Goldman Sachs.

Leveraged loan defaults hit $25 billion, head for third worst year in history, Goldman

iShares Core U.S. Aggregate Bond ETF

iShares iBoxx High Yield Corporate Bond ETF

Demand for actively managed senior loan ETFs has skyrocketed in the past year, helping State Street Global Advisors and First Trust fill their coffers. Indeed, the two firms have pulled nearly $9 billion combined into these less interest rate-sensitive, yet higher-yielding fixed income securities.

BlackRock Sets Stage for Own Active Senior Loan ETF

For the flows week, investors injected net new money into taxable fixed income funds and municipal bond funds. On the tax-exempt side, municipal bond funds attracted their third largest weekly net inflows on record and largest since June 10, 2020.

News for First Trust Senior Loan Fund ETF (FTSL)