First Trust Advisors L.P. (“First Trust”), a provider of more
than 200 investment products, many of which offer transparency, tax
efficiency and a rules-based approach to stock selection, will
launch a new actively managed exchange-traded fund (“ETF”) on May
2, 2013, the First Trust Senior Loan Fund (NASDAQ:
FTSL).
The First Trust Senior Loan Fund (“the Fund”) seeks to generate
high current income and preserve capital by investing primarily in
a diversified portfolio of first-lien senior floating rate bank
loans (“senior loans”). Under normal market conditions, at least 80
percent of the Fund’s net assets will be invested in senior loans
made to businesses operating in North America. Up to 20 percent of
the Fund’s net assets may be allocated to non-senior loan debt
securities, equity securities and warrants. The Fund attempts to
outperform the S&P/LSTA U.S. Leveraged Loan 100 Index and the
Markit iBoxx USD Leveraged Loan Index.
The Fund is First Trust’s fourth actively managed ETF and will
bring the firm’s total number of ETFs to 76. The active management
structure allows the Fund’s Portfolio Managers to potentially
obtain both attractive risk-adjusted and absolute returns over
time.
“While an index-based senior loan ETF principally considers the
market value of the debt issuance outstanding in its selection
methodology, an actively managed ETF gives us the latitude to
utilize our rigorous credit process in evaluating an individual
company’s ability to repay its debt, which we believe is paramount
to driving attractive risk-adjusted and absolute returns over the
long term,” said William Housey, CFA, Senior Vice President and
Senior Portfolio Manager at First Trust, who serves as one of the
Fund’s Portfolio Managers. “Many fixed-income investors are looking
for alternative sources of income that have historically performed
well when interest rates have increased, such as senior loans, and
we believe an actively managed ETF is an ideal way for investors to
access a diversified portfolio of senior loans while gaining
enhanced transparency and liquidity.”
Senior loans are generally made to below-investment-grade
companies, and are secured by collateral of the issuing company and
positioned at the top of the capital structure. In addition, senior
loans have interest rates that reset every 30 to 90 days. This
“floating rate” feature sets senior loans apart from high-yield
bonds and other fixed-rate bonds, as senior loans may generate
higher levels of income as short-term interest rates increase.
Senior loans’ secured position within a capital structure can
mitigate losses in the event of a default. According to Moody’s,
the average recovery rate for senior loans between 1987 and 2012
was 80.6 percent, compared to 63.7 percent for senior secured
bonds, 48.6 percent for senior unsecured bonds and 28.5 percent for
subordinated bonds.
First Trust believes that due to senior loans’ impressive
recovery rate, lower sensitivity to rising interest rates, and
their historically low correlations to other fixed-income asset
classes, senior loans can potentially decrease volatility and
improve risk-adjusted returns for a well-diversified portfolio.
“While nobody knows exactly when interest rates will climb up
from today’s historic lows, we believe such an increase, when it
occurs, can be devastating to a traditional fixed-income
portfolio,” said Mr. Housey. “The First Trust Senior Loan Fund is
unique because it offers investors an opportunity to capitalize on
the relatively attractive yield from senior loans while
simultaneously providing a degree of protection from the harmful
effects of a potential increase in interest rates.” It is important
to note there is no assurance the fund’s goal or objectives will be
achieved or maintained.
In addition to Mr. Housey, Scott D. Fries, CFA, Senior Vice
President and Portfolio Manager at First Trust, also serves as
Portfolio Manager to the Fund.
For more information about First Trust, please contact Chris
Moon of JCPR at 973-850-7304 or cmoon@jcprinc.com.
About First Trust
First Trust Advisors L.P., along with its affiliate First Trust
Portfolios L.P., are privately-held companies which provide a
variety of investment services, including asset management and
financial advisory services, with collective assets under
management or supervision of approximately $72 billion as of March
31, 2013 through unit investment trusts, exchange-traded funds,
closed-end funds, mutual funds and separate managed accounts. First
Trust is based in Wheaton, Illinois. For more information, visit
http://www.ftportfolios.com.
You should consider the fund’s investment objectives, risks,
and charges and expenses carefully before investing. Contact First
Trust Portfolios L.P. at 1-800-621-1675 to obtain a prospectus or
summary prospectus which contains this and other information about
the fund. The prospectus or summary prospectus should be read
carefully before investing.
ETF Characteristics
The fund lists and principally trades its shares on the NASDAQ
Stock Market LLC.
Investors buying or selling fund shares on the secondary market
may incur customary brokerage commissions. Market prices may differ
to some degree from the net asset value of the shares. Investors
who sell fund shares may receive less than the share’s net asset
value. Shares may be sold throughout the day on the exchange
through any brokerage account. However, unlike mutual funds, shares
may only be redeemed directly from the fund by authorized
participants, in very large creation/redemption units.
RISKS
The fund’s shares will change in value and you could lose money
by investing in the fund.The fund is subject to market risk. Market
risk is the risk that a particular security owned by the fund or
shares of the fund in general may fall in value.
Senior Loan securities are subject to numerous risks, including
credit risk, interest rate risk, income risk and prepayment risk.
Credit risk is the risk that an issuer of a security will be unable
or unwilling to make dividend, interest and/or principal payments
when due and the related risk that the value of a security may
decline because of concerns about the issuer’s ability to make such
payments. Credit risk may be heightened for senior loans because
companies that issue loans tend to be highly leveraged and thus are
more susceptible to the risks of interest deferral, default and/or
bankruptcy. Interest rate risk is the risk that if interest rates
rise, the prices of the fixed-rate instruments held by the fund may
fall. Income risk is the risk that if interest rates fall, the
income from the fund’s portfolio will decline as the fund intends
to hold floating- rate debt that will adjust lower with falling
interest rates. Prepayment risk is the risk that an issuer of a
loan may exercise its right to pay principal on an obligation
earlier than expected. This may result in the fund reinvesting
proceeds at lower interest rates, resulting in a decline in the
fund’s income.
Senior floating rate loans are usually rated below investment
grade but may also be unrated. As a result, the risks associated
with these loans are similar to the risks of high yield
fixed-income instruments. High yield securities are subject to
greater market fluctuations and risk of loss than securities with
higher ratings. High-yield securities are subject to numerous
risks, including higher interest rates, economic recession,
deterioration of the junk bond market, possible downgrades and
defaults of interest and/or principal. High yield securities are
subject to greater market fluctuations and risk of loss than
securities with higher ratings. These securities are issued by
companies that may have limited operating history, narrowly focused
operations, and/or other impediments to the timely payment of
periodic interest and principal at maturity.Lower-quality debt
tends to be less liquid than higher-quality debt.
The fund invests in securities of non-U.S. issuers. Such
securities are subject to higher volatility than securities of
domestic issuers. Because the fund’s NAV is determined on the basis
of U.S. dollars and the fund invests in foreign securities, you may
lose money if the local currency of a foreign market depreciates
against the U.S. dollar.
The fund currently intends to effect a significant portion of
creations and redemptions for cash, rather than in-kind securities.
As a result, the fund may be less tax-efficient than if it were to
sell and redeem its shares principally in-kind.
The fund is subject to management risk because it is an actively
managed portfolio. In managing the fund’s investment portfolio, the
advisor will apply investment techniques and risk analyses that may
not have the desired result. There can be no guarantee that the
fund will meet its investment objectives.
The fund is classified as “non-diversified.” A non-diversified
fund generally may invest a larger percentage of its assets in the
securities of a smaller number of issuers. As a result, the fund
may be more susceptible to the risks associated with these
particular issuers, or to a single economic, political or
regulatory occurrence affecting these issuers.
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