ETF Education Report: First Trust High Income Long Short Fund (FSD)

What this ETF is trying to do

The First Trust High Income Long Short Fund (FSD) is an exchange-traded fund (ETF) listed on the NYSE. While the specific investment strategy is not detailed in the provided data, the name suggests it focuses on generating high levels of income for investors.

What the numbers show

It is important to understand that "price return" and "total return" tell different stories. Price return only tracks how much the share price changes. Total return includes both the price change and the money paid out through distributions.

As of July 19, 2024, the current price is $12.22. Here is how the fund has performed:

• Year-to-Date (YTD): The price return is approximately 1.08%. However, the YTD total return is higher at approximately 7.52%.

• One Year: The one-year price return is approximately 4.80%. The one-year total return is approximately 16.92%. To understand the price change, we can look at an estimated price from roughly one year ago, which was approximately $11.66.

• Three Years: The three-year price return shows a decline of approximately -21.16%. Despite this share-price decline, the three-year total return is positive at approximately 7.31%.

Income and distribution explanation

This ETF has a distribution yield of approximately 10.31%. This means the fund pays out a significant amount of cash relative to its price. These distributions usually happen monthly, with 12 payments made over the last year.

It is important to remember that a high distribution yield does not mean you earned that percentage as your total return. Distributions provide cash income, but they do not guarantee that your original investment (your principal) will stay the same value.

NAV erosion explanation

"NAV erosion" is a term used to describe when the value of the underlying assets in a fund decreases over time. While a falling market price is not the same thing as NAV erosion, they can be related.

The fund has an erosion-risk score of 55, which is labeled as "moderate price erosion." This is an erosion-risk measurement rather than proof that the NAV has definitely collapsed. There is no "severe erosion-risk flag" for this fund at this time.

Pros

• Higher Total Returns: In the one-year and three-year periods, the total return was higher than the price return, showing that distributions added value to the overall performance.

• Regular Cash Flow: The fund has a history of monthly distributions.

Cons

• Share-Price Decline: The three-year price return shows a significant decline of over 21%.

• Moderate Erosion Risk: The fund shows a moderate level of price erosion risk.

Beginner takeaway

When looking at high-yield ETFs, it is easy to focus only on the distribution yield. However, a high yield can be misleading if the share price is falling significantly. Income investors often look for funds where the price stays steady or grows slightly, because if the share price drops too much, it can offset the benefits of the cash payments received. Always look at the total return to see how both price changes and distributions work together.