Although 2013 was a pretty rough year for income strategies, demand for ETFs that focused in on yield remained extremely high. In fact, many issuers actually put out new products in this space, greatly beefing up the number of options at investors’ disposal in this key market segment.
And while some might think that we are approaching market saturation in the income ETF world, First Trust clearly doesn’t think so. The firm has just released three more funds with an income focus, giving investors even more choices in this crowded market (read 3 Best Dividend ETFs of 2013).
Though these funds might face stiff competition, there is some hope for these products since they do find a way to offer up a twist on the space. Below, we highlight these three newcomers in greater detail, and how these might stack up against the competition:
First Trust NASDAQ Rising Dividend Achievers ETF- RDVY
This product tracks the NASDAQ US Rising Dividend Achievers Index, focusing on 50 companies that have a history of raising dividends, and look likely to raise them in the future as well. This is done by looking at a company’s earnings growth, levels of cash compared to debt, and the amount of earnings that are paid out as dividends.
In particular, the fund looks at historical dividend increases, EPS, a cash to debt ratio greater than 50%, and a payout ratio less than 65%. One these criteria are satisfied, 50 of the best ranked companies are selected for inclusion (see 3 Red Hot Dividend ETFs).
It should also be noted that the index is equally weighted and that it is reconstituted annually, and rebalanced quarterly. The fund looks to charge investors 50 basis points a year in fees for this exposure.
Top Competition: There are other funds on the market which offer up exposure to the dividend growth strategy, and could be tough foes for this new First Trust product. In particular the Vanguard Dividend Appreciation ETF (VIG - Free Report) and the SPDR S&P Dividend ETF (SDY - Free Report) could be big roadblocks.
Both SDY and VIG have more than $10 billion in assets under management, and zero in on companies that have been increasing dividends over the long haul. Plus, both are cheaper than the new First Trust product.
First Trust High Income ETF - FTHI
This ETF looks to focus on high income stocks, but with a twist. The product will use an active management strategy along with index options in order to produce income and provide capital appreciation.
The fund will primarily focus on high dividend-paying large-cap stocks, and it will also write covered call options on the S&P 500 index to produce additional cash. These options will use a range of call maturities, and the average time to expiration will be roughly one month.
Investors should also note that the notional value of calls written will be between 25%-75% of the overall fund. The product isn’t cheap though, as it will charge 0.85% from investors, though this is comparable to many option strategy-focused products out there (See 3 Covered Call ETFs to Pump Up Your Income).
Top Competition: This looks to be the most intense competition as there are a wide range of funds that occupy the high income ETF market. Some of the biggest competitors look to be the ALPS Sector Dividend Dogs ETF (SDOG), the PowerShares S&P 500 High Dividend Portfolio (SPHD), and the First Trust Morningstar Dividend Leaders ETF (FDL).
All of these funds have a high dividend focus, and possess more than $100 million in assets under management too. And with yields approaching 3.5% for all three of these products, FTHI will have to show some solid (and consistent) income potential in order to compete in this space.
First Trust Low Beta Income ETF- FTLB
FTLB will take a similar approach as FTHI, using an active managed approach along with index options. In fact, this fund will also write covered call options on the S&P 500 index to produce additional cash, and its average time to expiration will also be roughly one month.
However, unlike its counterpart, it may use premiums to buy put options on the S&P 500 index, in order to protect against downside risks. The average time to expiration for these options will be between two and three months, and specific attention will be paid to the relative value of the S&P 500 index options when compared to other hedging alternatives in order to reduce costs.
Even with this more extensive process, this fund still costs 0.85% for investors. And with its focus on high yield, this could be a lower risk—but probably lower return as well—choice for investors in the income market (see Beat the Market with Smart Beta ETFs).
Top Competition: The low beta market is a little sparse for the U.S. space, as many of the low beta funds currently focus on international markets. With that being said, there are a few names which pay out decent yields and tend to focus on low beta companies.
These include the FlexShares Quality Dividend Dynamic Index Fund (QDYN) and the FlexShares Quality Dividend Defensive Index Fund (QDEF). However, both of these products haven’t exactly attracted a great deal of interest so far, though they haven’t been on the market for that long either.
These ETFs somehow manage to offer up novel exposure in an extremely crowded space. Yet while they might have found a way to differentiate themselves, it will undoubtedly be a tough road to build up a sizable asset base.
Due to this, these funds may struggle in the beginning to get a huge following, especially if dividend-focused ETFs underperform thanks to the taper talks. However, they all appear to have solid methodologies and could be interesting choices for investors seeking new income plays to start 2014.
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