First Trust Intermediate Duration Preferred & Income Fund (FPF)

The First Trust Intermediate Duration Preferred & Income Fund, trading as FPF on the New York Stock Exchange, is a closed-end investment fund managed by First Trust Advisors. The fund invests in a portfolio of US preferred stocks, corporate debt, and other income-producing securities with a mandate to deliver high current income to shareholders. Preferred stocks are a middle ground between bonds and common stocks: they pay a fixed or floating dividend like a bond, but they sit junior to bonds in the capital structure and senior to common shares. By blending preferreds with actual debt instruments, FPF aims to capture higher yields than a pure bond fund while maintaining some of the cushioning that preferred securities provide.

What preferreds are and why they matter

Preferred stocks occupy a unique place in corporate finance. When a company issues preferred shares, it promises to pay a fixed annual dividend (or one that floats with a benchmark rate) to preferred shareholders before any dividend is paid to holders of common stock. If the company faces financial stress, preferred holders get their claims satisfied before common shareholders do, but after creditors and bondholders. This seniority means preferreds typically offer lower yields than the company’s bonds (because they are riskier) but higher yields than the company’s common stock (because they are safer and have a contractual payment obligation).

The appeal of preferreds in an income-focused portfolio is that they offer a sweet spot: more yield than a bond from the same company, but less volatility than the common stock. In a rising interest-rate environment, preferreds tend to fall in price (like all fixed-income securities), but they often fall less than pure bonds do because the dividend cushion and equity-like characteristics provide some downside protection. Conversely, in a falling-rate environment, preferreds can deliver stronger gains than bonds because investors are willing to pay more for the yield.

The fund’s asset mix and strategy

FPF is not exclusively a preferred fund; it holds a mix of preferred stocks (usually the bulk of the portfolio), investment-grade and high-yield corporate bonds, and occasionally other income securities such as floating-rate notes or bank-loan shares. This blending allows the managers to adjust the portfolio’s risk profile: in a benign credit environment, they might increase exposure to higher-yielding preferreds and subordinated debt; in a stressed environment, they might shift toward safer, more senior instruments. The “intermediate duration” in the fund’s name signals that the portfolio is constructed to have an effective duration (interest-rate sensitivity) of roughly 3 to 10 years, which is middle-of-the-road for fixed-income funds — shorter-duration funds are less interest-sensitive, longer-duration funds more so.

The fund’s managers use a disciplined process to select holdings: analyzing the issuer’s creditworthiness, the seniority and coupon of the security, and the overall allocation across sectors and credit qualities. The goal is to find securities offering attractive yields relative to their risk. In some cases, FPF retains overweight exposure to specific issuers or sectors if the managers believe the yield compensation is unusually generous; in others, they lighten exposure to areas where valuations have risen and yields have become unattractive.

Leverage and distribution mechanics

Like many closed-end funds, FPF employs modest leverage to amplify its portfolio returns. The fund borrows money at short-term rates and invests it in longer-duration securities, capturing the spread between what it earns and what it pays to borrow. This math works as long as the yield on the portfolio exceeds the cost of leverage. If interest rates rise sharply or if credit spreads widen, the leverage can work the other way — the borrowed funds become more expensive while the portfolio’s yields remain fixed, squeezing the spread and potentially forcing a cut to distributions.

The fund is required by law to distribute a certain amount of earnings to shareholders, and in practice FPF aims for a consistent distribution rate. If the portfolio’s income and realized gains exceed the distribution, the fund can use the excess to build reserves or reduce leverage. If the income falls short, the fund may draw on accumulated reserves or rely on more leverage to maintain distributions. The balance of these mechanics appears in the fund’s quarterly and annual reports.

Interest-rate sensitivity and credit risk

FPF’s returns are shaped by two principal forces. The first is credit risk — the risk that issuers in the portfolio reduce or suspend dividends or default on debt. The second is interest-rate risk — the risk that rising rates cause the value of the fund’s fixed-income holdings to fall. For a preferred security with a 5 percent coupon, if interest rates rise and new preferreds are issued with 6 percent coupons, the 5 percent security’s price will fall until its yield to maturity matches the current market rate. This effect is strongest for longer-duration securities and less severe for shorter-duration ones.

The fund’s intermediate duration positioning offers a middle ground: it is less vulnerable to rate shock than a long-duration bond fund would be, but more sensitive than a short-duration or cash fund. In a low-rate environment, FPF’s income cushion is attractive; in a high-rate environment, the fund’s ability to preserve capital through a sell-off is tested. Furthermore, preferred stocks issued by financial companies (banks, insurance firms, mortgage REITs) — a large component of many preferred portfolios — are particularly sensitive to interest rates because changes in rates drive the value of their underlying businesses.

Competition and relative appeal

FPF competes with dozens of other closed-end income funds, open-end preferred mutual funds, and exchange-traded funds. Some competitors focus purely on preferreds, others mix preferreds with other income instruments, and some specialize in particular sectors or credit qualities. Open-end funds offer daily liquidity and lower fees; closed-end funds like FPF offer potentially higher yields through leverage and active management. The choice between them depends on an investor’s liquidity needs, fee sensitivity, and preference for consistency in distributions.

How to research FPF

Start with the fund’s monthly fact sheets and annual reports (available through First Trust’s website and the SEC, CIK 0001567569), which list all holdings, the portfolio’s average credit quality, effective duration, and the leverage ratio. Track the distribution history — is the fund consistently delivering from current income, or is it increasingly relying on return of capital? Compare the fund’s market price to its net asset value; closed-end funds trade at discounts or premiums to their underlying holdings, and that gap can represent either a buying opportunity or a warning signal depending on the direction.

Watch for significant portfolio shifts — if the managers move materially from preferreds toward bonds or vice versa, that signals a change in their view of relative value or risk. Finally, monitor trends in corporate credit, particularly for the financial sector (the largest preferred issuer), as changes in bank capital requirements or insurance-company solvency can affect the preferred market’s attractiveness across the board.