The First Trust LDSF ETF: A Steady Income Play in a Rising Rate World

The Federal Reserve's relentless rate hikes have left bond investors scrambling to balance income needs with the risk of principal erosion. Amid this environment, the First Trust Low Duration Strategic Focus ETF (LDSF) emerges as a compelling alternative, offering a monthly dividend of $0.072 per share and a 4.70% 30-Day SEC Yield—a stark contrast to the broader bond market's struggles. This article examines LDSF's low duration strategy, its ability to sustain income in rising rates, and why it deserves a place in income-focused portfolios.

The Low Duration Advantage

LDSF's effective duration of 2.37 years (as of March 2025) is its secret weapon. Duration measures sensitivity to interest rate changes; the lower the duration, the less a bond's price falls when rates rise. By targeting securities with ≤3-year maturities, LDSF minimizes principal volatility while still pursuing income. Its portfolio is split between:
- Investment-grade corporates (35.09% via the First Trust Limited Duration Investment Grade Corporate ETF),
- Floating-rate senior loans (7.99% via the First Trust Senior Loan Fund),
- and high-yield bonds (10.46% via the First Trust Tactical High Yield ETF).

These allocations anchor LDSF's income stream while limiting exposure to long-dated bonds, which have been hit hardest by rate hikes. The fund's weighted average duration is roughly half that of the Bloomberg US Aggregate Bond Index (duration ~5 years), a key reason it has outperformed that benchmark since 2020.

Dividend Sustainability in Question?

LDSF's consistent monthly dividends since its 2019 launch suggest stability, but investors should scrutinize its yield sustainability. The fund's $0.072 per share payout (as of June 2025) translates to a 4.56% 12-month distribution rate, supported by its 4.70% SEC Yield. However, the fund's negative 3-year Sharpe Ratio (-0.32)—a measure of risk-adjusted returns—highlights challenges.

While the Sharpe Ratio's negative reading reflects underperformance versus the risk-free rate, LDSF's primary goal is capital preservation, not outperforming equities. Its portfolio's short-duration focus has shielded it from the worst of rate-driven declines. For instance, the Bloomberg US Aggregate Bond Index posted a mere 0.52% 1-year return (as of March 2025), underscoring LDSF's yield advantage.

Risk Management: A Mixed Picture

LDSF isn't without risks. Its 0.82% expense ratio is moderate but higher than some broad bond ETFs. The fund's heavy reliance on high-yield and floating-rate debt (combined ~20% of assets) introduces credit risk, though senior loans' floating rates provide some inflation protection. Additionally, the negative Sharpe Ratio signals that LDSF's returns have lagged the risk-free rate over three years—a concern if rates stay elevated longer than expected.

Portfolio Composition: A Balancing Act

LDSF's top holdings reveal a deliberate strategy to diversify income sources while limiting duration:
1. First Trust Limited Duration Investment Grade Corporate ETF (35.09%): Targets intermediate-term investment-grade bonds, offering steady but modest yields.
2. First Trust Low Duration Opportunities ETF (34.89%): Focuses on short-term corporate and government bonds, further reducing duration exposure.
3. First Trust Tactical High Yield ETF (10.46%): Adds yield via high-yield corporates, though this segment has seen widening spreads in 2025.
4. First Trust Senior Loan Fund (7.99%): Floating-rate loans mitigate rate risk but carry credit risk tied to corporate borrowers.

This mix keeps LDSF's duration below 3 years, a key defensive feature. However, its heavy tilt toward First Trust's own ETFs raises concentration risks. Investors should monitor whether these sub-ETFs maintain their yield and liquidity.

Investment Thesis: A Role in Income Portfolios

LDSF isn't a get-rich-quick play. Its 1-year return of 5.27% (vs. the Aggregate Bond's 0.52%) and consistent monthly dividends make it a reliable income generator for retirees or conservative investors. While the negative Sharpe Ratio is a red flag for growth-focused portfolios, LDSF's primary appeal lies in its yield stability and volatility management.

Final Take

In a rising rate environment, LDSF's low duration strategy and dividend consistency give it an edge over traditional bond funds. The 4.70% SEC Yield and 2.37-year duration make it a viable alternative to cash or CDs, though investors must accept moderate volatility and potential dividend cuts if credit spreads widen further.

Action Items for Investors:
1. Compare LDSF to alternatives: Use tools like
2. Monitor Fed policy: LDSF's performance will hinge on the Fed's path—sustained hikes could test its high-yield exposure.
3. Diversify defensively: Pair LDSF with short-term Treasuries or inverse rate ETFs to hedge against unexpected rate spikes.

In short, LDSF isn't perfect, but its niche as a yield-focused, low-duration ETF makes it worth considering for portfolios seeking income without excessive duration risk.