Advisors Asset Management has introduced its first fixed income ETF with the launch of the AAM Low Duration Preferred and Income Securities ETF (PFLD US) on NYSE Arca.

The fund offers investors high monthly income with low interest-rate risk.

The fund provides passive exposure to a low-duration portfolio of preferred and hybrid securities listed in the US.

The ETF offers investors high monthly income (the fund is currently yielding 6.2%) which is diversified away from traditional bond income streams.

Preferred securities may also pay qualified dividends which are taxed a lower rate than ordinary income.

Currently exhibiting an effective duration of 1.3 years, the ETF will also appeal to investors who are concerned about interest-rate risk in their portfolios.

Methodology

The fund is linked to the ICE 0-5 Year Duration Exchange-Listed Preferred & Hybrid Securities Index which comprises US dollar-denominated securities with an option-adjusted duration under five years.

To be eligible for inclusion in the index, preferred stock issuances must have at least $100 million face value outstanding, while hybrid debt securities must have more than $250m outstanding and a time to maturity greater than 18 months. Securities with prices above 105% of their face value are removed from the selection.

The index includes various categories of preferred stock and hybrid securities such as floating and fixed-rate preferreds, fixed-to-floating rate securities, callable preferreds, convertible preferreds, cumulative and noncumulative preferreds, capital securities, and preferred or hybrid REITs.

While the index focuses on securities listed in the US, the methodology extends to American Depository Receipts (ADRs) of non-US companies.

Currently, the vast majority of the index is allocated to US companies (88.7%); the next largest country exposures are Germany (4.3%) and the Netherlands (3.9%).

Investment-grade, high-yield, and non-rated securities are eligible for inclusion. Nearly half (45.2%) of the index is allocated to securities rated ‘BBB’, followed by ‘BB’ (27.3%) and non-rated securities (18.5%).

The index is weighted by market capitalization subject to a single issuer cap of 4.75%. Reconstitution and rebalancing occur on a monthly basis.

The ETF has been seeded with $2.5m and comes with an expense ratio of 0.45% which is one basis point cheaper than the $16.9 billion iShares Preferred and Income Securities ETF (PFF US), the largest ETF to cover the preferred and hybrid securities market.

PFF tracks the ICE Exchange-Listed Preferred & Hybrid Securities Index which has similar requirements in terms of maturity, amount outstanding, issuer cap, and credit rating; however, the index covers securities from across the broad yield curve.