Modest analytical support combined with the embedded risks of First Trust Low Duration Opportunities ETF’s LMBS mortgage-heavy approach limits this strategy’s appeal. It earns a Morningstar Medalist Rating of Neutral.
Experience is a strength. When comanagers Jim Snyder and Jeremiah Charles joined First Trust in 2013 to build out the firm’s mortgage-related strategies, they had already spent roughly 25 and 10 years in the industry, respectively. 
The team is lean, however. For the roughly $5 billion in assets the manager run across a variety of mortgage-focused and multisector bond strategies, they draw on only four research and four quant analysts, with some turnover in the latter group. The strategy’s investment in some riskier areas of the securitized market could benefit from deeper resources.
The strategy’s mortgage focus makes it stand out. Whereas typical short-term bond Morningstar Category peers invested 44% of its assets in corporate credit, as of March 2023, this strategy generally invests 70%-90% in agency mortgages and the remaining in 10%-20% in cash and nonagency securitized debt.  
The strategy’s agency mortgage bias gives it a higher-quality tilt, but risks reside in the 10%-20% stake in nonagency securities, mostly residential and commercial mortgage-backed securities. It also invests in some riskier subsectors within the mortgage sleeve such as Z-tranches of collateralized mortgage obligations and nonperforming loans, among others. Over the past six years, the strategy has also held on an average 4% in interest-only agency mortgage derivatives, which add yield but can have volatile cash flows and liquidity challenges. That said, over the year ending in March 2023, the team halved its IO stake to 2%, as it found IOs less attractive in a higher interest-rate environment.
The strategy’s risk-taking has rewarded investors thus far since its late-2014 inception. Its 2.1% gain annualized through April 2023 outpaced most rivals. Amid the interest-rate hikes and economic uncertainty in 2022, for example, the strategy's 3.2% calendar-year loss beat the peer median drop of 4.7%, thanks in part to a shorter duration profile compared with most. Given the strategy’s tilt towards securitized fare, it will lag when corporates rally but is just as likely to surge ahead if corporate credit tumbles.

Analyst Rating

A distinct mortgage-focused short-term bond offering.

Analyst

Saraja Samant

First Trust Long Duration Opportunities ETF

First Trust Exchange-Traded Fund IV - First Trust Intermediate Government Opportunities ETF

First Trust Exchange-Traded Fund IV - First Trust Commercial Mortgage Opportunities ETF

The strategy distinguishes itself from most short-term bond category peers by investing heavily in securitized fare, which warrants caution in evaluating the approach’s embedded risks and the benefits of taking of those risks. The strategy earns an Average Process rating.
Mortgages are front and center here. Whereas most rivals focus more on corporate credit, this strategy typically invests 70%-90% in agency mortgages, and the remaining 10% to 20% in a mix of cash and nonagency securitized debt. Within the latter, the strategy has emphasized nonagency RMBS, typically holding around 10% in various subsectors, though it will also invest in nonagency CMBS. The team focuses its fundamental research on the nonagency allocation and uses a set of third-party models combined with internal market assumptions to analyze specific securitized credits. 
The managers aim to keep the fund’s interest-rate sensitivity in check by targeting a duration of 3 years or less, but they invest in securities across the maturity spectrum. They short agency mortgage TBA contracts and Treasury futures to hedge some of the portfolio risks and stay within their duration target. The managers will also invest in IO agency mortgage derivatives and Z-tranches of CMOs to boost the strategy’s yield, at the cost of dialing up the portfolio’s risk.  The managers have typically kept the portfolio's IO exposure under 10% but have gone as high as 14% in Z-tranche CMOs.

Average

Process

The team here is experienced, but its analytical support remains modest and not without some recent turnover. The fund earns an Average People Pillar rating. 
When comanagers Jim Snyder and Jeremiah Charles joined First Trust in 2013 to build out the firm’s mortgage-related strategies, they had already spent roughly 25 and 10 years in the industry, respectively. Snyder’s multiple stops started with a 14-year stint running short-duration government strategies for American Express Financial Advisors. He and Charles also worked together in the mid-2000s at Deerfield Capital Management on a variety of mortgage portfolios, predominantly packaged as hedge funds and separately managed accounts.
Snyder and Charles have bolstered the securitized group’s resources in recent years. They’ve hired two experienced nonagency research analysts and revamped their quantitative effort with three additions, including a new head of quant after the firm let his predecessor go after just a year. 
The comanagers’ supporting cast now numbers four investment analysts and four quant analysts. The team’s most senior research analyst and trader, Jud Tigerman, focuses on macro, hedging, and volatility analysis across the yield curve, while the quant team develops quant securitized asset models and screens for the strategy. Resources devoted to some of the riskier areas of structured product in which the strategy invests could be deeper.

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 Low Duration Opportunities ETF

LMBS is an actively managed fund that invests in a variety of mortgage-backed securities with target duration of less than 3 years.

First Trust Commercial Mortgage Opportunities ETF

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First Trust Institutional Preferred Securities & Income ETF

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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

AGNC Investment

AGNC Investment Corp - FXDFR PRF PERPETUAL USD 25 - Ser D 1/1000th int

AGNC Investment Corp. Deposit Shs Repr 1/1000th Cum Conv Red Pfd Registered Shs Series C

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Annaly Capital

Agency MBS is an attractive asset class for income investors due to its cheap valuation, high quality, and diversification benefits. The option-adjusted spread for Agency MBS is elevated compared to corporate credit spreads, making it an appealing investment. There are various ways to invest in Agency MBS, including through mortgage REITs, leveraged CEFs, unleveraged ETFs, and mREIT preferreds.

Why The Agency MBS Sector Is Worth A Look Now

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Mortgage rates have not been this high since before the housing crisis. And while the housing market is slowing, prices are still high.

High Mortgage Rates And High Inflation

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Barclays Bank iPath US Treasury 5-Year Bear Exchange Traded   Note 2011-12.7.21 Ser -A- Lkd to BC 2Y US Trsry Futs Trgtd Expsre

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The deficit spending that supported the economy in 2020 is showing up in hot inflation numbers in 2021. While I think the inflation numbers will get better in 2022, I do not believe they will get back to pre-pandemic levels because of owners' equivalent rents and wage gains in the CPI.

Mind The Bond Market

Inflation expectation is a key metric the Fed watches closely. Housing costs - based on different measures of rents - account for one-third of CPI.

Inflation Expectations Come Unanchored

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Active ETFs exceeded expectations during the past 12 months.

Active ETFs Not An Oxymoron

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In this post-coronavirus environment, the exchange traded fund industry, like many other market segments, has had to adapt to a new stay-at-home mindset. Take, for example, First Trust, which is known for their strength of hundreds of wholesalers and internal consultants, has changed the way it has done business to meet financial advisors whom can’t [.

How First Trust Is Touching Advisors Today

News for First Trust Low Duration Opportunities ETF ETF (LMBS)