The U.S. municipal bond market represents a $3.8 trillion market and First Trust, a leading exchange-traded fund (ETF) provider and asset manager, announced that it’s debuting two new actively managed ETFs, the First Trust Short Duration Managed Municipal ETF (NYSEArca: FSMB) and the First Trust Ultra Short Duration Municipal ETF (NYSEArca: FUMB). By investing primarily in municipal debt securities, the funds seek to provide federally tax-exempt income consistent with capital preservation.
Both funds are managed by First Trust using a strategy that focuses on a combination of quantitative analysis and fundamental research.
“Our experienced municipal securities team at First Trust employs a rigorous, disciplined approach to managing risk, while seeking to capitalize on yield curve, industry weightings, and individual credit opportunities.” – First Trust
“Even as interest rates have moved higher this year, investor demand for tax-free income from municipal bonds continues to stand out,” said Ryan Issakainen, CFA, Senior Vice President, ETF Strategist at First Trust.
In seeking attractive income, the funds will focus primarily on U.S. dollar denominated, investment-grade municipal securities. The portfolio managers will seek to maintain a weighted average duration of 1-3 years in the case of FSMB and less than one year in the case of FUMB.
Duration is a mathematical calculation of the average life of a debt security (or a portfolio of debt securities) that serves as a measure of its price risk. The short duration focus of these funds seeks to reduce the impact of interest rate movements while maintaining current income, as short-term municipal bonds have historically been less sensitive to rising interest rates.
“Our experienced municipal securities team at First Trust employs a rigorous, disciplined approach to managing risk, while seeking to capitalize on yield curve, industry weightings, and individual credit opportunities,” said Issakainen.
The portfolio managers seek bonds that they believe may perform well on a total return basis in various interest rate environments. Active portfolio management allows the funds’ managers to make portfolio adjustments as conditions change.
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The municipal securities team at First Trust sees ample investment opportunities in municipal bonds. In their view, credit fundamentals are improving for many municipal bond issuers and taxable equivalent yields are attractive relative to other fixed income asset classes. Given the rising interest rate environment as a result of stronger economic growth, they believe that, in the current market, positioning the funds along the shorter portion of the yield curve provides investors less interest rate sensitivity than longer duration portfolios.
Johnathan N. Wilhelm, Senior Vice President and Tom Futrell, CFA, Senior Vice President at First Trust, serve as senior portfolio managers of the funds. The two will share responsibilities for the day-to-day management of the funds’ investment portfolio.
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