First Trust acquires Cboe Vest’s S&P 500 ‘Dividend Aristocrats’ target income ETF

Mar 1st, 2021 | By | Category: Alternatives / Multi-Asset

ETF STRATEGY NEWS! ETF Strategy is delighted to announce the launch of ETF Strategy Hub (hub.etfstrategy.com), an on-demand repository of webcasts, videos, podcasts and white papers. Debuting with Special Series on Technology & Innovation in China and the Digital Economy.


First Trust has expanded its target-outcome offering with the acquisition of Cboe Vest‘s S&P 500 ‘Dividend Aristocrats’ product.

Karan Sood, CEO of Cboe Vest Financial

Karan Sood, CEO of Cboe Vest Financial.

Now reorganized and rebranded as the FT Cboe Vest S&P 500 Dividend Aristocrats Target Income ETF (KNG US), the ETF targets US large-cap stocks with sustainable dividend yields and utilizes a systematic covered call overlay to further boost income.

The strategy has existed since March 2018 and holds approximately $100 million in assets under management.

It is listed on Cboe BZX Exchange and comes with an expense ratio of 0.75%.

Cboe Vest will continue to oversee day-to-day management of the fund in its new role as sub-adviser.

Methodology

The fund tracks the Cboe S&P 500 Dividend Aristocrats Target Income Index which is designed is to generate an annualized level of income from stock dividends and option premiums that is approximately 3% greater than the annual dividend yield of the S&P 500 Index. Its secondary objective is to generate price returns that are proportional to the price returns of the S&P 500.

The index includes stocks from the S&P 500 Dividend Aristocrats Index that have options that trade on a national securities exchange. Constituents are equally weighted as of each quarterly rebalance.

The S&P 500 Dividend Aristocrats Index consists of S&P 500 companies that have increased dividend payments each year for at least 25 consecutive years. ‘Dividend Aristocrat’ stocks are typically high-quality companies with strong balance sheets, a history of stable cash flows, and earnings growth. Consistently increasing dividends is a means for management to signal confidence in their company’s growth prospects.

The index also utilizes a rolling series of written call options on each of the underlying stocks. This covered call strategy is ‘partial’ meaning that written call options will not exceed 20% of the value of each underlying Aristocrat stock.

According to Karan Sood, CEO of Cboe Vest Financial, the capital appreciation potential from holding dividend growth stocks supports the index’s growth component, while the premiums collected from the sale of the options, in addition to the stocks’ dividend payments, support the target income goal.

Sood commented: “In the past, equity investors who were seeking income had to choose between high dividend payers, which have historically delivered lower total returns with higher volatility, or dividend growers, which have historically delivered higher total returns but with lower dividend yields. We designed KNG with this dilemma in mind, targeting a level of income similar to that of high dividend payers, but with the potential for total returns and lower volatility expected of high-quality dividend growers.”

Ryan Issakainen, Senior Vice President, ETF Strategist at First Trust, said: “By systematically applying a covered call strategy to a portfolio of dividend growth stocks, we believe this ETF may be an effective tool for investment professionals as they address the needs of income-seeking investors.”

Sood notes that the fund may be deployed in an investor’s portfolio as a strategic income allocation, a strategic core US large-cap equity allocation, or an inflation hedge allocation.

Tags: , , , , , , ,

Leave a Comment