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First Trust, a provider of exchange-traded funds with operations in North America and Europe, has revealed plans to launch three new income-oriented equity ETFs: the First Trust High Income ETF (FTHI), the First Trust Low Beta Income ETF (FTLB), and the First Trust Nasdaq Rising Dividend Achievers ETF (RDVY).
The new funds are expected to begin trading on Nasdaq on January 7, 2014.
The First Trust High Income ETF seeks to provide current income, with a secondary investment objective of capital appreciation. The First Trust Low Beta Income ETF seeks to provide current income. Both funds will invest in large-capitalization equities listed on US exchanges, favouring high dividend-paying common stocks.
These two funds will also utilize an options strategy in which they will write (sell) US exchange-traded covered call options on the S&P 500 Index seeking to generate additional cash flow in the form of premiums on the options that may be distributed to shareholders on a monthly basis. A premium is the income received by an investor who sells the option contract to another party.
The First Trust Low Beta Income ETF may use a portion of the options premiums to purchase US exchange-traded put options on the S&P 500 Index. This hedging strategy will seek to provide this fund with downside protection and reduce the fund’s price sensitivity to declining markets.
The First Trust Nasdaq Rising Dividend Achievers ETF seeks investment results that correspond to the performance of the Nasdaq US Rising Dividend Achievers Index. The index is comprised of 50 companies with a history of raising their dividends and that exhibit the characteristics to potentially continue doing so in the future.
The index construction process considers a company’s earnings growth, levels of cash compared to debt and the amount of earnings that are paid out as dividends. Sector weights differ from traditional dividend paying strategies and are currently tilted toward those with the best dividend growth rates, such as the technology sector.
Each of the funds utilizes a unique investment process to screen for high quality dividend-paying companies with the potential to sustain or increase their dividends over time. The First Trust High Income ETF and the First Trust Low Beta Income ETF will combine an equity portfolio that is focused on dividend-paying stocks with an index option strategy to provide an overall portfolio that is tactical, transparent and actively managed. The investment process for the First Trust Nasdaq Rising Dividend Achievers ETF uses a blend of historical and forward looking screens intended to measure a company’s ability to grow its dividend, along with its share price.
Robert Carey, CFA and Chief Market Strategist of First Trust, commented: “Interest rates continue to remain suppressed and the prospects for strong returns from long duration fixed income instruments is questionable. With stock prices reaching new highs, investors are looking for alternative ways to generate income but without taking unnecessary risk. These new funds give investors more choice within the First Trust family of ETFs, while providing the added features of liquidity, transparency and cost efficiency.”