First Trust has introduced a new high-income ETF in the US that invests in American companies with sustainable dividends while utilizing a covered call overlay to further enhance yield.
The ETF aims to deliver consistent income that is approximately 8.0% above the dividend yield of the S&P 500.
The FT Cboe Vest Rising Dividend Achievers Target Income ETF (RDVI US) has been 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 heightened portfolio risk and created a performance drag for income-focused investors.
RDVI is designed to offer an alternative source of income that is uncorrelated to investors’ traditional sources of yield.
The ETF’s strategy was developed by options investing specialist Cboe Vest Financial, RDVI’s sub-advisor and manager of First Trust’s suites of ‘Target Outcome’ and ‘Target Income’ products.
Jeff Chang, President of Cboe Vest Financial, said: “Investors are, more than ever, challenged to find quality sources of income without increasing risk in their portfolios. We believe that RDVI, with its stock selection and partial covered call options strategy, offers a novel 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 RDVI is an effective tool for investment professionals seeking alternative sources of income to help satisfy their clients’ needs, while also providing opportunities for potential capital appreciation.”
Investment approach
The strategy targets a consistent level of income that, on an annual basis, exceeds the dividend yield on the S&P 500 by approximately 8.0%. The ETF makes distributions to investors on a monthly basis.
While the fund’s equities portfolio is actively managed, portfolio construction will be guided by the Nasdaq US Rising Dividend Achievers Index. The index comprises 50 US-listed companies from across the market capitalization spectrum, selecting firms that have a history of raising their dividends and exhibit the potential to continue doing so in the future. The methodology considers quality characteristics such as strong cash balances, low debt, and growing earnings when selecting individual constituents.
Each week, the ETF compares the dividend income of its equity holdings against the fund’s target distribution rate. It then seeks to bridge that 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-writing options strategies sell fully covered options to produce income, and in doing so, give up all of the potential future growth opportunities of the securities. Cboe Vest developed the Target Income partial covered call strategy which seeks to produce consistent current income and allow participation in the potential growth of Dividend Achievers stocks.”