First Trust Senior Loan ETF - Exchange Traded Forum · 2013-08-28 · S&P LSTA Index S&P LSTA Index 1.00 Merrill Lynch High Yield Index (HUC0) 0.77 Barclays Capital Aggregate Index

First TrustSenior Loan ETF (CAD−Hedged)

Confidential and not for distribution to the public | Advisor Use Only

Bobby Eng, CIMA

Senior Vice President & Head of Sales

First Trust Portfolios

(FSL:TSX) (FSL.A:TSX)

Agenda

• About First Trust

• Senior Loan ETF

• Product Summary


About First Trust


Mutual Funds + Separate

Managed Accounts + Other

$1.2 Billion

Our Products First Trust Corporate Overview

Exchange Traded Funds

First Trust Advisors L.P. is the portfolio advisor and utilizes the AlphaDEXTM stock selection methodology, a unique fundamental weighting approach of generating positive alpha

Closed-End Funds

First Trust Portfolios L.P. leverages its national and global relationships to provide a variety of investment solutions to retail clients

Mutual Funds

Funds managed by First Trust Advisors L.P., marketed by First Trust Portfolios Canada, designed to give investors access to variety of asset classes and research strategies not normally available to retail investors.

ASSET UNDER MANAGEMENT OR SUPERVISION BY FIRST TRUST ADVISORS

$70.1 Billion USD (as at 6/28/2013)

Variable Annuity Funds

$4.6 Billion

UITs

$45.2 Billion

Closed End Funds

$7.0 Billion

Exchange Traded Funds

$12.1 Billion


Investment Philosophy First Trust Corporate Overview

Percentage Growth in ETF Assets by U.S. ETF Sponsor 2010-2012

310%

183%

169%

121%

67%

51%

50%

18%

21%

-13%

First Trust

Wisdomtree

Vanguard

Van Eck

State Street

Powershares

BlackRock

Direxion

Guggenheim

Proshares

Covering the period from 12/31/2009 through 12/31/2012; includes the top ten U.S. ETF issuers by AUM.

Source: First Trust & Bloomberg. As of 12/31/2012


First Trust

Senior Loan ETF (CAD−Hedged)


(FSL:TSX) (FSL.A:TSX)

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

1/5/62 1/5/66 1/5/70 1/5/74 1/5/78 1/5/82 1/5/86 1/5/90 1/5/94 1/5/98 1/5/02 1/5/06 1/5/10

Historical 10 Year Treasury Yield1/5/1962 - 6/28/13

Source: Bloomberg, LPThe chart is for illustrative purposes only. Past performance is no guarantee of future results.

2.49%

Long Term Average Yield

6.55%

6/28/13

Treasury Yields Have Declined for Over 30 Years



Fixed Income Opportunity Set

Senior Secured Floating Rate Loans represented by the S&P LSTA Index. 1-5 Year US TIPS represented by the Barclays Capital 1−5 Year US TIPS Index which tracks inflation-protected securities issued by the U.S. Treasury with maturities from 1 and up to 5 years. 1−3 Year Treasury Index represented by the Barclays Capital 1−3 Year Treasury Index which consists of public obligations of the U.S. Treasury with maturities from 1 and up to 3 years. High Yield Bond Index represented by the BofA Merrill Lynch High Yield Index. US Aggregate Bond Index represented by the Barclays Capital US Aggregate Bond Index which covers the investment-grade, U.S. dollar-denominated, fixed-rate taxable bond market, including Treasuries, government-related and corporate securities, MBS (agency fixed-rate and hybrid ARM pass throughs), ABS, and CMBS. US Government Index represented by the Barclays Capital US Government Index which is comprised of the U.S. Treasury and U.S. Agency Indices and includes Treasuries and U.S. agency debentures. Investment Grade Corporate Index represented by the Barclays Capital US Corporate Investment Grade Index which consists of publicly issued U.S. corporate and specified foreign debentures and secured notes that meet the specified maturity, liquidity, and quality requirements.

In a persistently low interest rate environment, we believe investors have few options to generate a high level of income without assuming significant duration risk.

Sources: Barclays Capital, S&P LCD,

First Trust Advisors L.P. Chart data as of

June 30, 2013. The chart is for illustrative

purposes only and not indicative of any

fund. The illustration excludes the

effects of taxes and brokerage

commissions or other expenses incurred

when investing. Investors cannot invest

directly in an index. The historical

performance of the indices shown is for

illustrative purposes only and it is not

intended to imply or guarantee the

future performance of any asset class or

a fund. Past performance is no

guarantee of future results.

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

8.00%

9.00%

10.00%

0 1 2 3 4 5 6 7 8

Yie

ld t

o M

atu

rity

Duration

1-3 Year Treasury

Index1-5 Year US TIPS

Senior Secured Floating Rate

Loans

High Yield Bond Index

US Aggregate Bond Index

US Government

Index

Investment Grade Corporate Index

Fixed Income Opportunity Set – Duration/YTM


Characteristics of Senior Loans

S&P LSTA Index

S&P LSTA Index 1.00

Merrill Lynch High Yield Index (HUC0) 0.77

Barclays Capital Aggregate Index -0.05

Barclays Capital Intermediate Treasury Index -0.42

Barclays Capital Corporate Bond Index 0.32

Russell 1000 Index 0.46

Sources: Barclays Capital, S&P

LCD, First Trust Advisors L.P.

S&P/LSTA Leveraged Loan Index

Mar 2013, Review S&P LCD High-

Yield Weekly Review July 2, 2013,

Barclays Capital June 2013, Russell

Investments June 2013. The chart

is for illustrative purposes only and

not indicative of any fund.

The illustration excludes the

effects of taxes and brokerage

commissions or other expenses

incurred when investing. The BofA

Merrill Lynch US High Yield

Constrained Index tracks the

performance of U.S. dollar

denominated below investment

grade corporate debt publicly

issued in the U.S. domestic market

but caps issuer exposure at 2%.

Senior loans are represented by

the S&P/LSTA (Loan Syndications

and Trading Association) U.S.

Leveraged Loan Index (LLI). LLI

tracks the current outstanding

balance and spread over LIBOR for

fully funded term loans. An index

cannot be purchased directly by

investors. The historical

performance of the indices shown

is for illustrative purposes only and

it is not intended to imply or

guarantee the future performance

of any asset class or a fund. Past

performance is no guarantee of

future results.

Long-Term Correlation of Monthly ReturnsJuly 31, 1999 to June 30, 2013

-40.00%

-20.00%

0.00%

20.00%

40.00%

60.00%S&P/LSTA Leverage Loan Index

Annual Returns of Senior Loans


Characteristics of Senior Loans and High-Yield Bonds

Senior Loans typically:

� Are senior secured� Have floating interest rate� Have protective covenants

High-Yield Bonds typically:

� Have call protection� Pay a fixed coupon� Are junior to senior secured

loans

$-

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

Bil

lio

ns

Total Par Amount Outstanding

Institutional Loans Outstanding High Yield Bonds Outstanding

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

Senior Loans Senior Secured Bonds Senior Unsecured Bonds Subordinated Bonds

Average Recovery Rates Measured by Ultimate Recoveries

1987 - 2012

Source: S&P/LSTA Leveraged Loan Index June 2013, S&P LCD High-Yield Weekly Review April 4, 2013, Barclays Capital June 2013, Russell Investments June 2013. Moody’s Annual Default Study: Corporate Default & Recovery Rates


Senior Loan & High Yield Bond Default Rates

Source: Standard & Poor’s LCD Dec 2012, JP Morgan high yield research Dec 2012, Moody’s Annual Default Study: Corporate Default & Recovery Rates, 1920-2011. Universe includes Senior Loans and High-Yield Bonds.The charts are for illustrative purposes only and not indicative of any fund. Past performance is not indicative of future results. Investors cannot invest directly in an index.

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

Senior Loan LTM Default Rate High Yield LTM Default Rate Average Senior Loan Average High Yield

Senior Loan and High Yield Historical Default Rates December 1999 – June 2013


The Effect of a 1% Rise in Interest Rates

-4.11%

-6.81%

-1.92%

0.39%

2.50%

5.23%

-2.03%-2.73%

-9.22%

-7.38%

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

Barclays U.S.

Treasury, 5−7

Year

Barclays U.S.

Treasury, 10

Year Bellwether

Barclays U.S.

Investment

Grade

Corporate Bond,

5−7 Year

Barclays USD

Emerging

Markets Debt,

5−7 Year

Barclays U.S.

Intermediate

High Yield

Corporate Bond

S&P/LSTA

Leveraged Loan

Index

Merrill Lynch US

Preferred Stock,

Fixed Rate

Barclays

Municipal, 7

Year (6−8)

Barclays

Municipal, Long

Bond (22+)

Barclays Taxable

Municipal−Build

America Bonds

Hypothetical Total Return

Yield 1.68% 2.48% 3.22% 5.24% 6.63% 5.23% 5.28% 2.25% 4.33% 4.69%

Duration 5.80 9.29 5.14 4.85 4.13 0.25 7.31 4.99 13.55 12.07

The table illustrates hypothetical examples and does not represent the return on any particular investment. Data as of 6/28/13. Effective duration is used for the preferred index and modified adjusted duration for all others. Duration is a measure of a bond’s sensitivity to interest rate changes that reflects the change in a bond’s price given a change in yield. The performance figures are for illustrative purposes only and do not account for all factors that may potentially impact returns. Given that senior loans typically pay a floating rate of interest, they tend to have an effective duration of approximately zero. As such, we estimate the duration for senior loans to be approximately 0.25 years.

Comparison of Asset Class Performance in Periods of Rising Interest Rates


Source: Credit Suisse Asset Management.Credit Suisse Asset Management defines periods of rising rates as those in which the 10-Year US Treasury yield rose on a monthly basis for a period of six months or more. Indices used as proxies for asset classes are: US Equities (S&P 500 Index); Inflation-Linked (Barclays Capital US TIPS Index); Senior Loans (Credit Suisse Leveraged Loan Index); High Yield (Barclays Capital US Corporate High Yield Index); US Core Bonds (Barclays Capital US Aggregate Bond Index); and Emerging Markets Debt (Barclays Capital Emerging Markets Sovereign Bond Index). Indices are unmanaged and cannot be purchased directly by investors. The historical performance of the indices shown is for illustrative purposes only and it is not intended to imply or guarantee the future performance of any asset class or any fund. Past performance is no guarantee of future results.


First Trust Leveraged Finance Team

Leveraged Finance Team OverviewThe First Trust Leveraged Finance Team currently manages or supervises approximately $1 billion in senior secured bank loans and high yield bonds. These assets are spread across a closed-end fund, an open-end fund, an exchange-traded fund, a series of unit investment trusts, and two institutional separate accounts.

*First Trust Short Duration High Income fund is included under retail bank loan assets, although the fund holds some high yield assets as well.

$648.2

$186.1

$133.2

Assets under Management

and Supervision

as of 6/30/2013 in Millions

Bank Loans*

High Yield Bonds

Institutional Separate Accounts

The First Trust Advisors L.P. Leveraged Finance Team (“First Trust”) is a robust team of eleven experienced credit professionals, specializing in below investment-grade securities. The team is comprised of portfolio management, research, trading and operations. As of June 30, 2013, the First Trust Leveraged Finance Team managed or supervised approximately $1 billion in senior secured bank loans and high-yield bonds. These assets are invested across a closed-end fund, an open-end fund, two exchange-traded funds, a series of unit investment trusts and an institutional separate account.

Several principals have worked together for over a decade� The average number of years of experience for a Leveraged Finance Investment Team

member is approximately 16 years.� Each senior member holds:

• Chartered Financial Analyst (CFA) Designation• MBA degrees from highly regarded institutions (Northwestern University, University of

Chicago, and DePaul University)

Team has proven results over time� Demonstrated success in managing assets across vehicle types

• Retail: open-end funds, closed-end funds, asset selection for unit investment trusts• Institutional: separate accounts, structured products (CLOs), commingled institutional

funds

Varied and successful experience includes:� Rigorous fundamental credit analysis of high-yield credit, including bonds, broadly

syndicated and middle market loans in both the US and Europe� Work-out/restructuring experience

First Trust Takes a Different Approach


The investment process is a balanced combination of bottom-up fundamental credit analysis and portfolio construction.

• Fundamental credit analysis involves evaluation of the macro-economy, industry trends, consistency of cash flows, collateral coverage, and management quality.

• Portfolio Construction focuses on relative value within a risk management framework.

Market-Cap Weighted High Yield and Senior Loan Index ETFs


An issuer’s weight in the index is a function of the quantity and current price of its outstanding debt.

Traditional Cap-Weighting Approach

Debt Issuance

We

igh

t in

In

de

x

Traditional market-cap weighted high yield and senior loan index ETFs

Two factors determine which high yield bonds or senior loans are selected, and how they are weighted within the underlying index:

• Quantity of corporate issues• Price of bonds / loans

Investment implications:• Investors lend more to the most indebted borrowers, and less to the least

indebted borrowers, irrespective of their relative ability to repay their debt.

• Greater exposure to issuers that are either more heavily indebted or overvalued may result in an unnecessary drag on investment returns.


First Trust Senior Loan ETF – Why now?

Economic backdrop…

• Supportive of senior loan & high-yield credit performance:

• Modest economic growth

• Low default rates

• Generally sound corporate health

• Spreads continue to look attractive

• Potentially offering an attractive yield in a low interest rate environment

FSL Strategy rationale in current environment…

• Through an actively managed strategy, the portfolio may:

• Limit interest rate risk through investment in floating rate senior loans

• Limit potential credit losses through continuous credit monitoring and active selection

Experienced Team…

• Bottom-up fundamentally driven credit process within a risk-controlled portfolio construction

framework

• Successful track record

First Trust Senior Loan Fund (FTSL)

• Senior Loans: Senior loans are generally secured

by the assets of a given company. Senior loans secured

position within a capital structure may mitigate losses

in the event of a default.

• Floating Rate: The fund may provide an element

of protection against rising interest rates because

of the floating-rate feature of the senior loans in which

the fund invests.

• Active Management: FTSL is an actively managed senior

loan ETF, providing credit risk management, enhanced

liquidity and transparency for senior loan investors.

Fund DetailsPotential Benefits of Investing

Portfolio Managers

William Housey, CFA

Senior Vice President, Senior Portfolio Manager

17 years portfolio management/investment experience

Scott D. Fries, CFA

Senior Vice President, Portfolio Manager

19 years investment industry experience

18

Fund TickerCommon Class: FSLAdvisor Class: FSL.A

Fund Inception August 28, 2013

Primary Listing TSX

Distribution Yield** xxxx

Currency Hedged Yes

Management fee 0.85%

Trailer0.5% per annum (Advisor

Class Only)

Top 5 Holdings (%) as of 6/28/13 %

xxxx xxxxxxx xxx

xxxx xxx

xxxx xxx

xxxx xxx

Summary


Disclaimer

This presentation is for informational purposes only and is not and should not be taken or construed as investment or tax advice to any person. Specific investments and/or investment strategies should be evaluated in the context of an investor’s entire circumstances. Investors should consult their own advisors as to the merits of a particular investment. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund/ETF investments. Please read the prospectus before investing. Mutual funds/ETFs are not guaranteed, their values change frequently and past performance may not be repeated.


Documents

First Trust Senior Loan ETF - Exchange Traded Forum · 2013-08-28 · S&P LSTA Index S&P LSTA Index 1.00 Merrill Lynch High Yield Index (HUC0) 0.77 Barclays Capital Aggregate Index