First Trust has announced the launch of its third Cboe Vest Target Income ETF designed to address the need for alternative sources of income.
The firm writes that FT Cboe Vest Rising Dividend Achievers Target Income ETF (Cboe: RDVI) provides access to equities contained in the Nasdaq US Rising Dividend Achievers Index while also targeting annualised income.
Rising interest rates, low real bond yields, and increasingly positive stock/bond correlations have heightened portfolio risk and created a performance drag, the firm says. RDVI seeks to provide an alternative source of consistent income through a novel Target Income Strategy developed by Cboe Vest Financial LLC (“Cboe Vest”), sub-advisor to the fund and creator of Target Outcome Investments and Target Income Strategies.
Under normal market conditions, the fund will pursue its investment objective by investing primarily in US exchange-traded equity securities contained in the Nasdaq US Rising Dividend Achievers™ Index (the “Index”) and by utilising an “option strategy” consisting of writing (selling) US exchange-traded call options on the S&P 500 Index or ETFs that track the S&P 500 Index. I
n furtherance of its objectives, the fund seeks to make distributions from stock dividends and option premiums at an annual rate that are approximately 8.0 per cent (before fees and expenses) over the current annual dividend yield of the S&P 500 Index. The fund also seeks a secondary objective of generating capital appreciation based on the price returns of the equity securities held by the fund.
Jeff Chang, President of Cboe Vest, says: “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. In 2017, 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 Aristocrats stocks. We are pleased to extend this strategy to Dividend Achievers with the introduction of RDVI.
“Investors are, more than ever, challenged to find quality sources of income without increasing risk in their portfolios. We believe that RDVI, with its Dividend Achiever stock selection and partial covered call options strategy, offers a novel and timely approach,” Chang says.
“Despite increased volatility in the bond market this year, investors still need to generate income,” says Ryan Issakainen, CFA, Senior Vice President, ETF Strategist at First Trust. “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.”