Low Duration Income ETF Offers Protection From Low Rates

(Note: Third in a series on the biggest actively managed ETFs)

The First Trust Low Duration Opportunities ETF (NASDAQ:LMBS) is an actively managed, fixed-income fund that invests in an array of mortgage-backed securities and has a target duration of less than three years.

LMBS, an open-ended fund, occasionally will take positions in U.S. Treasury future bonds or options. It is among few exchange-traded funds (ETF) of its kind to focus on short-duration mortgage-backed securities.

The ETF invests in federal-agency-backed mortgage securities, as well as those from non-agencies and commercial issuers. By doing so, the fund raises its relative value and yield.

LMBS has a 0.67% expense ratio and a dividend yield of 2.24%. This MBS ETF has $5.26 billion in net assets and a net asset value of $51.67, with $5.39 billion in assets under management. Year to date (YTD), this fund’s total return is 0.64%.

Since December 2019, this fund has managed to climb and currently is above its 50-day moving average. Much like the rest of the market, this fund saw a drop in mid-March, with its lowest close YTD of $49.40 on March 23. However, as the chart below shows, it has started to make a recovery with a strong rise in early April, following a decent jump on March 27, when the closing price reached $51.25.

LMBS seeks to generate current income with a secondary objective of capital appreciation. In normal conditions, the fund seeks to achieve its investment objectives by investing at least 60% of its net assets in mortgage-related investments.

This non-diversified fund’s portfolio composition is 80.91% bonds, 19.08% cash equivalents and 0.01% other. Its top 10 holdings make up 48.56% of its total assets. The top five holdings as of June 2, according to Morningstar, are Federal National Mortgage Association 2.5%, 9.28%; Federal National Mortgage Association 2%, 4.97%; Fnma Pass-Thru 2.5%, 3.04%; Fnma Pass-Thru 4.5%, 2.78%; and Fnma Pass-Thru 2.5%, 2.07%.

This fund’s portfolio carries more of a material risk because it includes non-agency and commercial mortgage-backed securities. However, its short target duration has an increased appeal for investors worried about rising interest rates and still wanting a decent yield. This is a readily tradable ETF and has a solid daily volume.

In sum, while there is more risk in First Trust Low Duration Opportunities ETF (NASDAQ:LMBS), than in purely agency-backed MBS funds, it has made YTD gains and has not faltered much since its 2014 inception. With a low duration of less than three years, it is more protected from rising interest rates than some other ETFs. According to Yahoo Finance, LMBS has a bond rating of 98.15% in the AAA sector, which is a positive given that the majority of its portfolio consists of bonds.

As always, I am happy to answer any of your questions about ETFs, so do not hesitate to send me an email. You just may see your question answered in a future ETF Talk.

Jim Woods

Jim Woods is a 20-plus-year veteran of the markets with varied experience as a broker, hedge fund trader, financial writer, author and newsletter editor. Jim is the editor of Intelligence Report, Investing Edge, the Bullseye Stock Trader, and The Deep Woods (formerly the Weekly ETF Report). His books include co-authoring, “Billion Dollar Green: Profit from the Eco Revolution,” and “The Wealth Shield: How to Invest and Protect Your Money from Another Stock Market Crash, Financial Crisis or Global Economic Collapse.” He’s also ghostwritten many books and articles, as well as edited content for some of the investment industry’s biggest luminaries. His articles have appeared on many leading financial websites, including StockInvestor.com, InvestorPlace.com, Main Street Investor, MarketWatch, Street Authority, Human Events and many others. Jim formerly worked with Investor’s Business Daily founder William J. O’Neil, helping to author training courses in the CANSLIM stock-picking methodology. The independent firm TipRanks rates Jim the No. 3 financial blogger in the world (out of more than 6,000). TipRanks calculates that, since 2012, he's made 361 successful recommendations out of 499 total, earning a success rate of 72% and a +15.3% average return per recommendation. He is known in professional and personal circles as “The Renaissance Man,” because his expertise includes such varied fields as composing and performing music; Western horsemanship, combat marksmanship, martial arts, auto racing and bodybuilding. Jim holds a BA in philosophy from the University of California, Los Angeles, and is a former U.S. Army paratrooper. A self-described “radical for capitalism,” he celebrates the virtue of making money from his Southern California horse ranch.