First Trust has unveiled the First Trust Institutional Preferred Securities and Income ETF (NYSE Arca: FPEI), an actively managed fund investing in preferred securities issued mainly to institutional-level investors.

The First Trust Institutional Preferred Securities and Income ETF aims to select institutional-level preferred securities with strong relative value in the market.

Preferred securities tend to have both equity- and bond-like characteristics, falling between company debt and common stock in the seniority of the firm’s capital structure. They generally pay a regular fixed or floating dividend, making the security’s price sensitive to changes in interest rates. Although dividends may be suspended by the company’s board without the risk of default, some preferred shares may be cumulative in that unpaid amounts are accrued until the dividend is reinstated.

The security’s equity-like nature characterises it as a perpetual investment, although many preferred securities do have an embedded callable feature, exercisable after a specified time period. This tends to lead to a cap on the potential appreciation of the security’s price.

Institutional-level preferred securities are primarily sold over-the-counter to institutional investors only in large lot sizes. The fund may also hold hybrid capital securities, contingent capital securities, US and non-US corporate bonds and convertible securities.

FPEI will seek to provide a high degree of current income while aiming for modest capital appreciation as a secondary objective. While preferred securities may offer relatively high yields, the various product structures within the preferred share market can be confusing to investors. This may support the notion of an actively managed investment in the preferred securities market, administered by a team specialising in the different types of yield features, liquidity and covenants associated with different issuers.

Using both a bottom-up and top-down approach to security selection based on credit fundamentals, relative value and technical aspects of the securities, the management team will select those securities they believe represent the best relative value in the market.

FPEI has a total expense ratio (TER) of 0.85%.