First Trust Preferred Securities and Income ETF (FPE)FPE

ETF First Trust Preferred Securities and Income ETF (FPE)

Profile:

Focus: FPE is a passively managed ETF that invests primarily in investment-grade U.S. preferred securities.

Asset Allocation: The ETF aims for a 50/50 allocation between preferred securities and floating-rate loans, with exposure to various industries such as financials, utilities, energy, and consumer staples.

Investment Strategy: FPE employs a buy-and-hold strategy, seeking to replicate the performance of the ICE BofA Merrill Lynch US Preferred & Floating Rate Index.

Objective:

The primary investment goal of FPE is to generate potential current income in the form of dividends, with a secondary objective of capital appreciation.

Issuer:

First Trust Advisors L.P.:

• Reputation and Reliability: First Trust Advisors L.P. is a reputable ETF provider with a long track record, established in 1991 and managing over $228 billion in assets.
• Management: The team managing FPE boasts extensive experience and expertise in fixed income markets.

Market Share:

FPE holds a significant market share in the U.S. preferred stock ETF space, ranking second with roughly 13.37% of total assets in the category.

Total Net Assets:

As of November 30, 2023, FPE's total net assets amounted to approximately $15.43 billion.

Moat:

Competitive Advantages:

• Diversification: FPE provides exposure to a broad range of preferred securities across different industries, mitigating single-issuer risk.
• Passive Management: The buy-and-hold strategy aims for low portfolio turnover, resulting in lower transaction costs compared to actively managed funds.
• High Dividend Yield: FPE offers a consistently high dividend yield, appealing to income-oriented investors.

Financial Performance:

Historical Performance: FPE has experienced steady growth over the past years, with an average annual return of 5.41% since its inception in May 2006. Benchmark Comparison: FPE has generally outperformed the ICE BofA Merrill Lynch US Preferred & Floating Rate Index, indicating effective portfolio management.

Growth Trajectory:

The demand for preferred securities is expected to rise due to their attractive yields and lower volatility compared to common stocks, suggesting potential growth for FPE.

Liquidity:

Average Trading Volume: FPE boasts an average daily trading volume of over 500,000 shares, highlighting its active trading and high liquidity. Bid-Ask Spread: The bid-ask spread for FPE is typically tight, indicating low transaction costs.

Market Dynamics:

Factors affecting FPE's market environment include:

• Interest Rates: Rising interest rates can put downward pressure on preferred securities, as investors seek higher yields elsewhere.
• Economic Growth: A strong economy can boost company profits and increase the likelihood of dividend payments, positively impacting preferred securities.
• Sector Performance: The performance of specific industries, such as financials and utilities, can influence the value of FPE's holdings.

Competitors:

Key competitors of FPE include:

• iShares Preferred and Income Securities ETF (PFF): Market share - 36.74%
• VanEck Preferred Securities ex Financials ETF (PFXF): Market share - 9.47%
• Invesco Preferred ETF (PGX): Market share - 7.25%

Expense Ratio:

FPE has an expense ratio of 0.95%, which is considered relatively low for an actively managed ETF in this category.

Investment Approach and Strategy:

Strategy: FPE passively tracks the ICE BofA Merrill Lynch US Preferred & Floating Rate Index. Composition: The ETF primarily holds U.S. investment-grade preferred securities and floating-rate loans, providing exposure to a diversified range of sectors and issuers.

Key Points:

• High income potential: FPE offers a consistently high dividend yield.
• Diversification: The ETF provides exposure to a broad range of preferred securities across different industries.
• Low volatility: Preferred securities tend to be less volatile than common stocks.
• Liquidity: FPE is a highly liquid ETF with a tight bid-ask spread.

Risks:

• Interest Rate Risk: Rising interest rates can negatively impact the value of preferred securities.
• Credit Risk: The value of preferred securities can be affected by the creditworthiness of the issuers.
• Market Risk: The overall performance of the market can influence the value of FPE's holdings.

Who Should Consider Investing:

FPE is suitable for investors seeking:

• Current income: The high dividend yield provides a consistent income stream.
• Capital appreciation: Potential for capital gains exists alongside income generation.
• Income diversification: Preferred securities can offer diversification within a fixed-income portfolio.
• Low volatility: Investors seeking lower volatility compared to common stocks.

Fundamental Rating Based on AI:

8.5/10:

• Strengths: Strong historical performance, high dividend yield, competitive expense ratio, and experienced management team.
• Weaknesses: Interest rate risk and exposure to credit risk.

Justification: FPE offers a compelling combination of high income, diversification, and low volatility. The experienced management team and strong track record indicate effective portfolio management. While interest rate and credit risks exist, the overall strengths outweigh the weaknesses, resulting in a favorable fundamental rating.

Resources and Disclaimers:

• First Trust Advisors L.P. Website: https://www.ftportfolios.com/
• Morningstar ETF Page: https://www.morningstar.com/etfs/arcx/fpe
• Investopedia: https://www.investopedia.com/etf/preferred-stock-etfs-pff-pgx-fpk.asp

Disclaimer: This analysis is for informational purposes only and should not be considered investment advice. Please consult with a qualified financial advisor before making investment decisions.