First Trust Launches “Target Income” US Dividend ETF | ETF Strategy


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First confidence introduced a new US high-income ETF that invests in US companies with sustainable dividends while using a covered call overlay to further enhance yield.

The ETF aims to generate consistent income that is approximately 8.0% higher than the dividend yield of the S&P 500.

The FT Cboe Vest Rising Dividend Achievers Target Income ETF (RDVI US) was listed on Cboe BZX Exchange with an expense ratio of 0.75%.

First Trust notes that rising interest rates, low real bond yields and increasingly positive correlations between stocks and bonds have increased portfolio risk and dampened performance for income-oriented investors.

RDVI is designed to provide an alternative source of income that is uncorrelated to investors’ traditional sources of return.

The ETF strategy was developed by an options investment specialist Cboe Vest FinancialSub-Advisor to RDVI and Manager of First Trust’s Target Outcome and Target Income product lines.

Jeff Chang, Chairman of Cboe Vest Financial, said, “Investors are, more than ever, challenged to find quality sources of income without increasing the risk in their portfolios. We believe that RDVI, with its stock selection and partially covered call options strategy, offers a fresh and timely approach.

Ryan Issakainen, Senior Vice President, ETF Strategist at First Trust, added: “Despite increased volatility in the bond market this year, investors still need to generate income. We believe that RDVI is an effective tool for investment professionals looking for alternative sources of income to help meet the needs of their clients, while providing opportunities for potential capital appreciation.

Investment approach

The strategy aims for a consistent level of income that, on an annual basis, exceeds the dividend yield on S&P500 approximately 8.0%. The ETF pays distributions to investors on a monthly basis.

Although the fund’s equity portfolio is actively managed, portfolio construction will be guided by Nasdaq US Rising Dividend Achievers Index. The index includes 50 US-listed companies across the market capitalization spectrum, selecting companies that have a history of increasing their dividends and have the potential to continue to do so in the future. The methodology considers quality characteristics such as strong cash balances, low leverage and growing profits when selecting individual constituents.

Each week, the ETF compares the dividend income from its equity holdings to the fund’s target distribution rate. It then seeks to make up this difference by writing (selling) call options on the S&P 500 or ETFs that track the S&P 500.

Jeff Chang added, “The first generation of simple call option writing strategies sells fully covered options to generate income and in doing so forfeits all potential future growth opportunities in the securities. Cboe Vest has developed the Target Income partially covered call option strategy which aims to provide consistent current income and allow participation in the potential growth of the Dividend Achievers stock.

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