First Trust Converts Closed End Fund to ETF

June 18, 2007

SAN DIEGO (ETFguide.com) - The growing number of exchange-traded funds (ETFs) continues to be the result of new product offerings, but now another potential source of growth is being eyed: product conversions.

Today, the First Trust Value Line 100 ETF (AMEX: FVL), a converted closed-end mutual fund debuted on the American Stock Exchange. The $300 million fund is managed by Lisle, IL-based First Trust Advisors and is just the second such product conversion of its kind.

The fund's expense ratio is 0.70 percent and was lowered for at least two years following the reorganization.

Could this signal a chain reaction where more closed-end funds convert to an ETF structure?

It might, but ultimately the investment strategy behind the fund would have to be replicable and transparent. Such a conversion would likely work only for closed-end funds closely tied to a stock or bond index. Full blown actively managed ETFs have yet to be launched.

Under the terms of the reorganization, the assets and liabilities of the closed-end fund were transferred to the corresponding ETF and effected on June 15th.

The conversion represents a new strategy to reduce or eliminate the discount to net asset value (NAV) at which shares of closed-end funds can trade. In contrast, ETF share prices are expected to trade very closely to a fund's NAV. In the event the share price trades at a significant deviation from NAV, arbitrageurs may effect trades that serve to align the ETF’s share price with NAV.   

The First Trust ETF follows the Value Line 100 Index which selects top stocks ranked by Value Line's Timeliness Ranking System.

"The conversion of FVLCEF into an ETF allows us to maintain the same investment strategy and the integrity of the process – two key benefits to investors,” stated Dan Waldron, Senior Vice President of First Trust.