First Trust, the money manager known for its niche ETF strategies such as an Internet fund, filed paperwork with the Securities and Exchange Commission detailing plans to market two actively managed ETFs, one focused on inflation fighting and the other on senior loans with yields that rise along with interest rates.
Both the First Trust Inflation Managed Fund and the First Trust Senior Loan Fund will strive to generate income and protect capital over the longer term in an inflationary environment. First Trust didn’t specify trading symbols or annual expense ratios for the new funds.
The Inflation Managed Fund will invest in what the company called “inflation-related stocks”—companies in the energy and materials sector. It will also own ETFs and closed-end funds that hold commodities such as precious metals, inflation-linked government bonds and floating-rate securities.
The senior loan ETF will own a diversified portfolio that includes issuers with strong credit metrics. It might also invest in other instruments such as floating-rate loans of companies in financial trouble, floating-rate bonds, money market instruments and fixed-rate debt securities. The fund might also use derivatives.
First Trust’s funds are the latest addition to a growing field of ETFs that move beyond Treasury inflation-protected securities (TIPs) to address the corrosive effects inflation can have on returns. Investors are concerned that the Federal Reserve’s loose monetary policies have weakened the dollar and contributed to skyrocketing prices of commodities priced in dollars, notably crude oil and gold.
“In general, commodities have relatively high correlations with inflation, and the prices of real assets, such as gold, silver, oil and copper, often rise along with increasing interest rates and inflation,” the company said in the filing. “Additionally, commodities normally move in the opposite direction of the U.S. dollar.”
Inflation Managed Fund
That’s why First Trust’s proposed inflation managed fund will have 10 percent allocated to commodities ETFs that focus on gold and silver. The fund’s strategy will also include securities picked through fundamental, valuation and technical factors screens designed to weed out securities issued by companies that don’t have positive cash flow or that have credit-quality issues.
Stocks should represent about 60 percent of the total portfolio, but that could vary over time, the filing said. The remainder of the mix will be split among fixed income—in the form of ETFs that invest in inflation-linked bonds -- commodities and real estate.
The fund might also rely on derivative instruments to hedge against interest-rate and currency risk.
Senior Loan Fund
The senior loan fund, meanwhile, may invest up to 20 percent of its net assets in fixed-rate bonds, and up to 10 percent of its net asset value might be tied to non-U.S. securities that are traded over the counter or listed on an exchange.
The strategy might also include investing in some ETFs, the filing said.
