A sound investment process and strong management team underpin First Trust TCW Unconstrained Pls Bd ETF's Morningstar Medalist Rating of Silver. The portfolio maintains a cost advantage over competitors, priced within the second-lowest fee quintile among peers.  

 The strategy merits a High Process Pillar rating. The strategy’s management team earns an Above Average People Pillar rating. The strategy's parent organization earns the firm an Average Parent Pillar rating. People, Process and Parent Pillar ratings for this strategy are indirectly assigned by a Morningstar analyst rather than algorithmically derived. Please see the notes following each pillar section for more details. The details of assigning methods can be found in each pillar section.

Analyst Rating

Genpact

Built to succeed by the sum of its parts, the fund's process should remain intact as Laird Landmann and Steve Kane transition into retirement. It retains a High Process rating.
The team's investment process, which is consistent across products, has exhibited a strong balance between flexibility and discipline, and the managers have been able to execute throughout a variety of market environments. This offering has the widest latitude within TCW's fixed-income lineup. The approach puts credit risk front and center, with nonagency residential mortgages, asset-backed securities, and corporate bonds figuring prominently here. The team also makes limited use of credit default swaps and mortgage derivatives. Like others in the nontraditional bond Morningstar Category, this strategy has a broad mandate; by prospectus, its duration can be negative, while currencies and equities are allowed in significant size.
In practice, the managers have not used that flexibility to its fullest extent, and instead, it has operated as a credit-heavy “best ideas” portfolio. For example, duration has stayed between 1.0 and 4.0 years, while equity exposure has been zero, compared with more adventurous category peers that own equities or have had a negative duration. Those peers may outperform this strategy over distinct time periods, but the managers' value sensitivity and flexibility should give it an advantage over the long term.

Note: The Process Pillar rating and analysis are indirectly assigned by an analyst. When an analyst covers a vehicle that follows a given strategy (as codified by Morningstar’s StrategyID data point) Morningstar maps the covered vehicle’s Process Pillar to any other uncovered vehicles that follow the same strategy (that is, share the same StrategyID). This ensures that the analyst’s view is leveraged whenever available and promotes consistency when assigning Process Pillar ratings to vehicles that follow the same strategy.

High

Process

TCW loses two of its leading voices with the upcoming retirements of Laird Landmann and Steve Kane. An impressive team remains, but in recognition of that loss, the fund's People rating has been downgraded to Above Average from High.
The first retirement will come at the end of 2023, with Laird Landmann stepping down, and the second at the end of 2024, with Steve Kane doing the same; but those departures are not isolated. Both follow former CIO Tad Rivelle's 2021 exit. Replacing the expertise and shared experience of Landmann, Kane, and Rivelle will be hard. The trio all started at Pimco in the early 1990s, moved on to Hotchkis & Wiley, and co-founded Metropolitan West Asset Management in 1996, which TCW acquired in late 2009. That level of continuity is rare, and it's hard to quantify what TCW loses in their absence.
They leave behind an impressive group of fixed-income investors, including generalist portfolio manager Bryan Whalen, who will become the sole CIO starting Jan. 1, 2024. Here Whalen will work alongside new generalist portfolio managers Ruben Hovhannisyan and Jerry Cudzil, as well as co-head of corporate credit Steve Purdy. Hovhannisyan has spent most of his career directly supporting (and learning from) the generalist managers and has expertise in portfolio analytics and construction. Until this promotion, Cudzil oversaw corporate trading and co-led the corporate credit team—a bright spot in recent years. Purdy's inclusion is sensible given the heavier credit component here compared with other funds in their lineup.
The supporting sector teams are experienced and impressive, and they should continue to drive security selection outcomes.

Note: The People Pillar rating and analysis are indirectly assigned by an analyst. When an analyst covers a vehicle that follows a given strategy (as codified by Morningstar’s StrategyID data point), Morningstar maps the covered vehicle’s People Pillar ratings to any other uncovered vehicles that follow the same strategy (that is, share the same StrategyID). This ensures that the analyst’s view is leveraged whenever available and promotes consistency when assigning People Pillar ratings to vehicles that follow the same strategy.

Above Average

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.

Average

Parent

First Trust TCW Unconstrained Plus Bond ETF

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