First Trust Global Portfolios (FTGP) has launched an exchange traded fund (ETF), which it claims is the first actively managed foreign exchange ETF in Europe.
The new First Trust FactorFX Irish-domiciled Ucits ETF (FTFX) is available on the London Stock Exchange and has a total expense ratio of 0.75 per cent.
It will hold a basket of between 20 to 30 currency pairs in developing and emerging markets through forward FX contracts, futures, money market instruments and short-dated sovereign debt, and will complement the FTGP fundamentally-weighted AlphaDEX fund range.
As a result of the low yields in the market, First Trust said it wanted to deliver total returns by investing in currencies – the most liquid and largest asset class in the world.
Yields have compressed, lessening yield income and total returns over the long term. The Barclay’s Global Aggregate Index Yield has reduced from 4.2 per cent to 1.52 per cent over 10 years to the end of March 2017. This new ETF, which is targeted at wealth managers, DFMs, advisers and institutional investors, applies two risk premium – of value and momentum – to the carry trade in currency markets.
FTFX goes long on undervalued currencies and higher-yielding currencies, and short on overvalued, lower-yielding currencies, aiming to deliver total returns by focusing on the yield differential.
It also seeks exposure to currencies displaying positive momentum and avoids negative momentum currencies, First Trust added. FTGP is a UK-based affiliate of First Trust Advisors an independent ETF provider in the US since 1991. First Trust has total assets under management or supervision in excess of $107. 566 billion as at 30 June 2017.
Provider view
Leonardo DaCosta, portfolio manager, said: “Currency is an asset class, and an extremely liquid one.
“By focusing on the yield differential of currency pairs, the fund can potentially generate total returns in a world of compressed yields, and is a great way to add portfolio diversification.”
Derek Fulton, FTGP chief executive, added: “Our new fund offers investors a way to capture international yield differentials while potentially managing currency volatility without taking on credit or duration risk. Currencies also tend to have low correlation to bonds and equities.”
Adviser view
Alan Steel, managing director of Alan Steel Management, said: “This sort of product looks like it’s cashing in on a latest fad. This is, in my view, a high- risk product that is suitable only for people with more money than sense, or for those who’ve had a frontal lobotomy.
“In my 44 years since becoming an IFA in January 1973, each time before when such risky products are designed, it tells me a market top is nigh. I worry about ETFs at the best of times. Linking them with currencies increases the volatility index exponentially in my view.
“Personally, I wouldn’t touch this with a 10 ft bargepole, although it could be early adopter smart cookies could make a few bob if they get out before the world caves in."
Dennis Hall, chief executive officer of Yellowtail Financial Adviser, added: “The Factor FX fund is complicated, but dressed up as something simple. It seems to imply an algorithm or some other rules-based methodology that determines which currency pairs to buy and when, but investing isn’t that simple, in my opinion.”
Charges:
The fund has a total expense ratio of 0.75 per cent.
Verdict:
Linking such a product with currencies makes it volatile and high-risk. Only time will tell whether this product will become a success.
