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
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-
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
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 (
SPDR S&P Dividend ETF (
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
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
3 Covered Call ETFs to Pump Up Your Income
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 (
PowerShares S&P 500 High Dividend Portfolio (
, and the
First Trust Morningstar Dividend Leaders ETF (
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
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 (
FlexShares Quality Dividend Defensive Index Fund (
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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GLBL-X SPRDV US (DIV): ETF Research Reports
SPDR-SP DIV ETF (SDY): ETF Research Reports
VANGD-DIV APPRC (VIG): ETF Research Reports
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