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, has
launched a new actively managed exchange-traded fund (“ETF”), the
First Trust High Yield Long/Short ETF (NASDAQ: HYLS).
The First Trust High Yield Long/Short ETF (“the Fund”) seeks to
provide current income by investing primarily in a diversified
portfolio of below-investment-grade or unrated high-yield debt
securities, including U.S. and non-U.S. corporate debt obligations,
bank loans and convertible bonds. Its secondary objective is to
generate capital appreciation. Since the historical correlation of
performance between high-yield securities and traditional
fixed-income, including investment-grade corporate bonds and
Treasury securities, is low, First Trust believes the addition of
high-yield securities to a well-diversified portfolio has the
potential to enhance overall return and provide diversification
benefits while potentially decreasing portfolio volatility.
The Fund’s investment approach includes a long/short strategy
designed to capitalize on investment opportunities in various
market environments. Under normal market conditions, the Fund’s
Portfolio Managers intend to maintain long and short positions in
securities, and consequently may take short positions in U.S.
Treasury securities and/or corporate debt obligations which may be
rated investment-grade or considered to be high-yield securities.
The ability to maintain short Treasury positions allows the
Portfolio Managers to potentially isolate a portion of the
interest-rate risk from the credit risk inherent in the high-yield
securities in the Fund’s portfolio. The Portfolio Managers believe
that credit fundamentals within high-yield remain strong as a
result of the ongoing, albeit modest, economic recovery, relatively
strong corporate cash flow generation on the part of issuers and
low corporate defaults within the high-yield market.
“At a time when investors are growing concerned about the
potential fallout from increasing interest rates on their fixed
income portfolios, First Trust is offering investors the
opportunity to potentially capitalize on the strength of the
high-yield bond market and U.S. corporate credit fundamentals while
mitigating a portion of the interest-rate risk,” said William
Housey, CFA, Senior Vice President and Senior Portfolio Manager at
First Trust, who serves as one of the Fund’s Portfolio Managers.
“By combining a rigorous credit selection process with this Fund’s
long/short strategy, First Trust’s experienced leveraged finance
investment team believes it can help investors achieve higher
risk-adjusted returns in many different market conditions.”
In addition to potentially mitigating risk, the long/short
strategy may enhance returns via the implementation of the “carry
trade,” a process whereby a borrowed security is sold and the short
seller profits by using the proceeds to purchase another security
with a higher interest rate. The Portfolio Managers can unwind the
Treasury short positions at any time, and intend to layer in short
sales on high-yield debt securities when they believe corporate
defaults may increase.
In times of unusual or adverse market, economic, regulatory or
political conditions, the Fund may not be able, fully or partially,
to implement its short selling strategy. Short selling creates
special risks which could result in increased volatility of
returns. There is no guarantee that any leveraging strategy the
Fund employs will be successful during any period in which it is
employed.
“The historically low interest rates in today’s market present
difficulties for investors seeking income, but we believe this Fund
offers a long-term solution within a risk-managed framework for
high-yield investors,” said Mr. Housey. “Active portfolio
management and alternative investment strategies, particularly this
Fund’s approach to reducing interest-rate risk by adding senior
loans and a short Treasury position, may help investors obtain
enhanced returns from fixed-income investments in the wake of
increasing interest rates.”
Along with Mr. Housey, the Fund’s Portfolio Managers include
Scott D. Fries, CFA, Senior Vice President and Portfolio Manager;
Peter Fasone, CFA, Vice President and Portfolio Manager; and Vice
Presidents and Fixed Income Portfolio Managers Todd Larson, CFA,
and Eric Maisel, CFA.
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 $67 billion as of
January 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.
An investor 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.
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.
High-yield securities are subject to 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. 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.
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.
The fund may invest in convertible bonds. The market values of
convertible bonds tend to decline as interest rates increase and,
conversely, to increase as interest rates decline. A convertible
bond’s market value also tends to reflect the market price of the
common stock of the issuing company.
Companies that issue loans tend to be highly leveraged and thus
are more susceptible to the risks of interest deferral, default
and/or bankruptcy. Senior floating rate loans, in which the fund
may invest, 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. Loans
are subject to pre-payment risk. The degree to which borrowers
prepay loans may be affected by general business conditions, the
financial condition of the borrower and competitive conditions
among loan investors, among others. The fund may not be able to
reinvest the proceeds received on terms as favorable as the prepaid
loan.
In times of unusual or adverse market, economic, regulatory or
political conditions, the fund may not be able, fully or partially,
to implement its short selling strategy.
Lower-quality debt tends to be less liquid than higher-quality
debt. The fund may invest in Distressed Securities and many
Distressed Securities are illiquid or trade in low volumes and thus
may be more difficult to value.
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 affect 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 objective.
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