We discuss the process behind and recent outperformance of the First Trust Fixed Income Model (Total Return) ([FTFIXINC.TR]).
The Fed cut the Fed Funds Rate a quarter point this week for the first since December of 2024. Given the timing, it’s worth mentioning one of the fixed income models that has shown an impressive track record over the last few years. One of the hallmarks of momentum-based strategies is their ability to adapt to changing trends within the market and given asset class. A model that has adapted well to trends within the fixed income space is the First Trust Fixed Income Model (Total Return) (FTFIXINC.TR).
The First Trust Fixed Income Model utilizes a relative strength (RS) matrix and total return pricing data to compare a lineup of nine First Trust fixed income funds. The four highest ranking funds within the relative strength matrix are selected for inclusion in the model and are only sold when they fall sufficiently out of favor within the RS matrix. The model is evaluated on a monthly basis and remains 100% invested at all times, only rebalancing when a change to the model occurs.
The last change to the model occurred in July of this year when the Preferreds (FPE) were sold and High Yield (HYLS) was purchased. When looking at the trade history of the Model, the first thing you'll note is the model maintains exposure to less interest rate sensitive areas of the fixed income space(Preferreds, Senior Loans, and High Yield), for much of the past 3 years. Meanwhile, the strategy has rotated in Convertibles and Emerging Market Bonds during that time as well, substituting Short Maturity fixed income when Preferreds or Convertibles have taken a dip. With momentum-based strategies, like the First Trust Fixed Income Model, performance is dependent on not only what is owned in terms of leadership, but also on what areas to avoid.
Year-to-date, the First Trust Fixed Income (Total Return) (FTFIXINC.TR) is up 9.66% on a total return basis and is outperforming its benchmark, the iShares US Core Bond ETF (AGG), by more than 3%. The table below shows the 6-Month Rolling Excess performance of the First Trust Fixed Income Model (Total Return) over the Aggregate Bond ETF (Total Return). Since the end of 2022, the Model has outperformed its Index in the last 22 out of 33 rolling periods, while outperforming by at least 4.75% in the last three straight 6-month rolling periods. Since inception, the First Trust Fixed Income Model has gained 37.78% (3.87% annualized) on a total return basis, while the Model’s benchmark, the Aggregate Bond Index AGG.TR, added 15.53% (1.81% annualized) (4/12/2017 – 9/18/2025).
While the Fed is projecting two more rate cuts in 2025, given the two fronts the Fed monitors, the path forward is uncertain. Though investors may be wondering about the Fed’s ability to adapt to what may transpire in the coming months, NDW users of fixed income strategies like the First Trust Fixed Income (Total Return) Model have shown a track record of being able to adapt to different interest rate environments.
