First Trust adds US Internet ETF to Target Income suite

Mar 22nd, 2024 | By | Category: Alternatives / Multi-Asset

First Trust Advisors has launched a new actively managed ETF delivering yield-enhanced exposure to US equities of internet-related companies.

First Trust adds US Internet ETF to Target Income suite

The ETF seeks to deliver a target income yield through dividends and option premiums.

The FT Vest Dow Jones Internet & Target Income ETF (FDND US) has been listed on Cboe BZX Exchange with an expense ratio of 0.75%.

First Trust notes that rising interest rates, low real bond yields, and increasingly positive correlations between stocks and bonds have heightened portfolio risk and created a performance drag for income-focused investors.

In response to these challenges, the firm developed its Target Income ETFs which seek to deliver a specific yield through a combination of typically dividend-paying equities and option premiums received from a rolling series of covered calls.

Actively managed and sub-advised by options investing specialist Vest Financial, Target Income ETFs seek to increase total income for investors while also participating in the potential price appreciation of the equities held in the portfolios.

Each of the funds compares the dividend income of its equities against its target income and looks to bridge any difference with the premiums from the call options. The process is repeated weekly.

Investment approach

FDND seeks to make distributions at an annual rate of approximately 8.0% (before fees and expenses) over the annual dividend yield of the Nasdaq 100. The fund has a secondary objective of capital appreciation.

To achieve this objective, the fund invests in securities contained within the Dow Jones Internet Composite Index while simultaneously writing call options on the Nasdaq 100 and S&P 500 indices.

The Dow Jones Internet Composite Index selects the largest and most actively traded stocks of US Internet companies, targeting 15 firms from the Internet commerce sector and 25 from the Internet services sector. Firms must derive at least 50% of their revenue from Internet commerce (or services) to be categorized as belonging to that sector.

The index is weighted by float-adjusted market capitalization with a single constituent cap of 10%. Additionally, the aggregate weight of constituents with weights of 4.5% or more is restricted to 45%. First Trust notes, however, that the ETF’s equities sleeve may deviate from the exact composition and weighting of the index.

Ryan Issakainen, Senior Vice President, ETF Strategist at First Trust, commented: “We are thrilled to expand First Trust’s lineup of Target Income ETFs with the launch of FDND, which will enable investors to effectively harvest some of the volatility inherent in internet stocks by selling call options against a portion of its holdings.”

Jeff Chang, President of Vest Financial, added: “In 2017, Vest revolutionized the market with our Target Income partial covered call strategy, which seeks to generate consistent current income and allow participation in the potential growth of stocks. We are pleased to extend this strategy to FDND. For the first time, investors can collect current income while still potentially participating in some of the price appreciation of the stocks in the Dow Jones Internet Composite Index.”

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