AEM:CC - FTRI: 6% Yield And Exposure To Commodities Without Contango

2023-11-03 14:17:27 ET

Summary

• First Trust Indxx Global Natural Resources Income ETF features a 6% yield and has almost 80% of its asset value in energy and materials.
• About 43% of asset value is in the U.S. and Canada, and about 65% is in developed countries.
• FTRI offers global exposure to commodities without the risk of decay due to roll yields in futures-based ETFs. However, it is quite volatile.

This article series aims at evaluating ETFs (exchange-traded funds) regarding the relative past performance of their strategies and metrics of their current portfolios. As holdings and weights change over time, updated reviews are posted when necessary.

FTRI strategy and portfolio

First Trust Indxx Global Natural Resources Income ETF ( FTRI ) started investing operations on 3/11/2010 and tracks the Indxx Global Natural Resources Income Index. As of writing, it has 48 holdings, a 12-month distribution yield of 6.11%, and a total expense ratio of 0.70%. Distributions are paid quarterly.

As described by First Trust , eligible stocks must be classified in five sectors or subsectors: energy, materials, agriculture, water and timber. They are screened regarding certain criteria, in particular liquidity, size and dividend history. Then, the 50 companies with higher dividend yields are selected as constituents. They are weighted based on free float adjusted market capitalization. The number of securities in each of the five categories is capped at 30%. The Index is reconstituted annually in June and rebalanced quarterly.

Large and mega-caps represent 60% of asset value. North America is the heaviest region (43% of assets), followed by Asia (29%) and Latin America (18%). The top five countries are the U.S. (30.7%), Australia (18%), Brazil (13.7%), Canada (12.8%), and China (8.6%). Other countries are below 5% individually and 17% in aggregate. The next chart plots the top 10 countries, representing 96% of asset value.

The portfolio is concentrated in energy (42.3%) and basic materials (37.4%). The heaviest industries at GICS level 2 are Oil, Gas & Consumable Fuels (41.8%) and Metals & Mining (19.9%).

Regarding valuation ratios (reported in the next table), FTRI is cheaper than two related US sector benchmarks: Energy Select Sector SPDR Fund ( XLE ) and Materials Select Sector SPDR Fund ( XLB ). These metrics may be biased by the geographical allocation: valuation ratios are more expensive in the US stock market.

The portfolio is quite concentrated in the top 10 holdings, listed below: they represent 59.5% of asset value. The top 4 names weighs between 6% and 11% individually and 36% together. Risks related to other holdings are moderate.

*U.S. tickers for convenience. The fund holds shares of these companies in the primary exchanges.

FTRI vs. competitors

The next charts compare total returns of FTRI and four non-hedged international dividend funds with yields over 5%:

• iShares International Select Dividend ETF ( IDV )
• First Trust Dow Jones Global Select Dividend ETF ( FGD )
• SPDR S&P Global Dividend ETF ( WDIV )
• WisdomTree International High Dividend Fund ( DTH ).

FTRI has lagged them in the last 10 years, but beats all of them by far in the last 3 years.

FTRI started outperforming in 2021 when inflation surged. However, FTRI is correlated to commodity prices, not directly to inflation. In the last 12 months, inflation was running hot, but oil and copper prices have gone sideways, and so did FTRI, underperforming its peers (next chart).

Between 2012 and 2022, annualized distributions have increased by 121%, from $0.52 to $1.15 per share. In the same time, the cumulative inflation has been about 29%. It looks great, but it was an uneven path (see next chart), mostly linked to oil price. Distributions collapsed along with oil price in 2015 after the OPEC failed to establish an output policy. It happened again in 2020, when a Saudi-Russian clash sent oil price to the ground (the forward month WTI futures price briefly became negative).

Takeaway

First Trust Indxx Global Natural Resources Income ETF is invested in about 50 international high-yield stocks, with almost 80% of asset value in energy and materials sectors. About 43% of asset value is in the U.S. and Canada, and about 65% is in developed countries. The portfolio is quite concentrated: 36% of assets is in the top 4 companies. Past performance looks correlated to commodity prices. The 10-year dividend growth is great, but distributions collapsed twice with oil price.

First Trust Indxx Global Natural Resources Income ETF is a good choice for investors seeking exposure to commodities, without the risk of decay due to roll yield in futures-based ETFs (usually called contango). However, keep in mind that both price and distributions may be very volatile.

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