New First Trust Active ETF

More investors have zeroed in on various yield-generating options as an alternative route to the low interest rates in Treasury bonds. Exchange traded fund investors now have another option with First Trust’s new actively managed preferred- and income-themed ETF.

According to a press release, the First Trust Preferred Securities and Income (NYSEArca: FPE) began trading Tuesday, Feb. 12. FPE tries to generate income through holding preferred securities and income-producing debt securities, such as corporate bonds, high-yield securities and convertibles. The fund has a 0.85% expense ratio. [Preferred Stock ETFs Yielding 6% Still Chugging Along]

Specifically, the active ETF will hold senior notes, “baby bonds” – bonds issued in small denominations, trust preferred securities, newer hybrid structures, DRD preferreds, REIT preferreds and QDI preferreds.

Preferred securities have a higher seniority to common stocks in distribution payments and in case of liquidation of the company’s assets. However, they are junior to the company’s debt. Issuing companies typically have to pay all dividends on its preferred securities before earnings are dived out to common stockholders.

According to a First Trust research note, preferreds are an attractive source of income, with the BofA Merrill Lynch Fixed Rate Preferred Securities Index yielding an average 7.3% for the 10-year period ended January 31, 2013, compared to investment corporate debt with an average yield of 5.0%.