First Trust Value Line 100 Converting From Closed To Open Ended Fund

The board of directors for the $280 million First Trust Value Line 100 (FVL) closed-end fund have voted to convert the fund into an ETF. The conversions – subject to shareholder approval – would be the second CEF to convert to open-end status, following the December transition of the First Trust Value Line Dividend Fund (FVD) to closed-end status.

The decision by the board surprised some, for while it is clearly in the best interests of shareholders, it is not clearly in the best interests of First Trust.

For shareholders, converting to open-end status promises to eliminate the 8-15 percent discount to net asset value [NAV] that has historically plagued FVD. Indeed, following the board’s decision, the fund jumped 6 percent in value in a single day, almost eliminating the discount even before shareholders voted on the deal.

But for First Trust, it could see assets in the fund decline sharply, as investors rush to cash in once the fund returns to par. That’s what happened following the December conversion of FVD: the fund held $540 million in assets as a CEF, but investors have pulled out approximately $210 million since the fund converted to ETF status. We will likely see similar fallout over FVL.

First Trust will also lower the expense ratio on the fund: for FVD, it dropped from 93 to 70 basis points.

Clearly, however, First Trust believes that this is the right thing to do, and that over the long term, assets in the funds will stabilize and perhaps begin to grow again. That is one key advantage of ETFs for product issuers: CEFs can’t really grow new assets, while ETFs can.

FVL 1-yr chart: