First Trust has expanded its suite of ‘Target Income’ ETFs by launching two new funds delivering yield-enhanced exposure to quality, dividend-paying companies within the mid & small-cap and technology sector segments of the US equity market.
First Trust’s Target Income ETFs seek to deliver a specific level of yield through a combination of dividends and option premiums.
The FT Cboe Vest SMID Rising Dividend Achievers Target Income ETF (SDVD US) and FT Cboe Vest Technology Dividend Target Income ETF (TDVI US) have been listed on Cboe BZX Exchange with expense ratios of 0.85% and 0.75%, respectively.
First Trust notes that rising interest rates, low real bond yields, and increasingly positive correlations between stocks and bonds have heightened portfolio risk and created a performance drag for income-focused investors.
In response to these challenges, the firm developed its Target Income ETFs which seek to deliver a specific level of yield through a combination of dividend-paying equities and option premiums received from a rolling series of covered calls.
Actively managed and sub-advised by options investing specialist Cboe Vest Financial, Target Income ETFs seek to increase total income for investors while also participating in the potential price appreciation of the equities held in the portfolios.
Each of the new funds compares the dividend income of its equities against its target income and looks to bridge any difference with the premiums from the call options. The process is repeated weekly.
Jeff Chang, President of Cboe Vest, commented: “The first generation of simple call-writing options strategies sell fully-covered options to produce income, and in doing so, give up the majority of the potential future growth opportunities of the securities. In 2017, Cboe Vest developed the Target Income partial covered call strategy, seeking to produce consistent current income and allow participation in the potential growth of stocks. We are pleased to extend this strategy to SDVD and TDVI.”
Ryan Issakainen, Senior Vice President, ETF Strategist at First Trust, added: “Investments seeking to monetize volatility by strategically writing call options have grown more popular over the past couple of years. We believe SDVD and TDVI will be effective tools for investors seeking a relatively high level of current income with the potential to meaningfully participate in the upside price appreciation of two popular dividend strategies.”
Mid and small-caps
The FT Cboe Vest SMID Rising Dividend Achievers Target Income ETF seeks to make distributions at an annual rate that is approximately 8.0% (before fees and expenses) over the annual dividend yield of the Russell 2000 Index which was 1.63% in 2022.
To achieve this objective, the fund invests in securities contained within the Nasdaq US Small-Mid Cap Rising Dividend Achievers Index while simultaneously writing call options on the Russell 2000 Index.
The Nasdaq US Small-Mid Cap Rising Dividend Achievers Index is composed of high-quality, mid and small-capitalization US companies with a history of raising their dividends. Only firms exhibiting the financial robustness that implies they will be able to continue paying their current dividend yields are selected for the index.
Technology stocks
The FT Cboe Vest Technology Dividend Target Income ETF seeks to make distributions at an annual rate that is approximately 8.0% (before fees and expenses) over the annual dividend yield of the Nasdaq 100 which was 0.99% in 2022.
To achieve this objective, the fund invests in securities contained within the Nasdaq US Technology Dividend Index while simultaneously writing call options on the Nasdaq 100 and S&P 500 indices.
The Nasdaq US Technology Dividend Index is composed of US stocks classified as technology or telecommunications companies with a history of paying dividends. Again, only firms exhibiting the financial robustness that implies they will be able to continue paying their current dividend yields are selected for the index.