FTRI - FTRI: Compelling Value In High-Yield Natural Resources Stocks With An 8% Yield

2023-08-23 01:49:38 ET

Summary

• FTRI offers exposure to the top 50 dividend yield stocks across natural resource producers.
• The fund yields 8.4% through a quarterly payout.
• We are bullish on commodities and see room for FTRI to rally higher.

The First Trust Indxx Global Natural Resources Income ETF ( FTRI ) offers a unique strategy for investing in high-yield stocks. The fund takes the top 50 global companies by dividend yield, focusing on the exploration and production segment of commodities across energy, materials, agriculture, water, and timber producers.

The result here is a compelling 8% yield for the fund through a quarterly distribution with a distinct profile compared to alternative ETFs. While commodities have been volatile over the past year, we are bullish on the group and view FTRI as a good option for income investors or anyone seeking portfolio diversification.

What is the FTRI ETF?

FTRI is a passively managed fund meaning it's intended to simply track the "Indxx Global Natural Resources Income Index". This is a rules-based strategy that selects the top 50 dividend-yielding stocks in the segment through a free float-adjusted market capitalization-weighting methodology.

Other eligibility criteria state that each security must have positive earnings over the past year with at least two year history of making a dividend distribution. This rule works as a sort of qualifier to screen out fundamentally challenged or lower-quality companies. There is also a minimum market capitalization required for inclusion at $1 billion.

We mentioned FTRI's commodities exposure through a variety of natural resource producers. Importantly, the fund caps the weighting of holdings by each of the five natural resource categories between energy, materials, agriculture, water, and timber at 30%.

This means that beyond the ranking by dividend yield, the excess allocations are spread across the smaller groups. In other words, stocks that would not otherwise make the cut. These levels may vary over time based on the quarterly rebalancing and annual index reconstitution done in June.

Brazilian energy-giant Petrobras SA ( PBR ) is the largest position in the fund with a 10.5% weighting. In this case, the stock's current yield is listed at over 22%, although this considers a variable payout structure where the company has been distributing nearly 100% of free cash flow to shareholders over the past year. The expectation is that the forward yield moderates lower.

Down the list of holdings, agricultural names like Archer-Daniels-Midland Co ( ADM ) and Nutrien Ltd ( NTR ) along with precious metals miners like Agnico Eagle Mines Ltd. ( AEM ) and Newcrest Mining Ltd. (NCMGF) are within the top 10 holdings.

FTRI Performance

Overall, what stands out to us is the relatively diverse group of names within the FTRI portfolio. The "global" of the fund is evident considering U.S. companies represent less than 30% of the holdings. Diversification includes stocks both in developed and emerging markets combing to create a basket that doesn't quite have a comparable benchmark.

Maybe the closest exchange-traded fund to FTRI's profile is the SPDR S&P Global Natural Resources ETF ( GNR ). In this case, the GNR invests passively across natural resource producers, but high-yield dividends are not the focus.

Favorably, we find that FTRI has managed to outperform over the past five years on a total return basis with a 40% return compared to 36% from GNR.

On the other hand, FTRI has lagged more recently, including this year, which we would connect to its more concentration exposure to emerging markets and relative tilt away from mega-caps compared to GNR. Both funds are down modestly year-to-date reflecting the weakness and volatility in commodities overall, coming off record highs in early 2022.

The point here is not to say that FTRI or GNR is "better" than one another, but have some key differences. First, FTRI comes in with a larger expense ratio of 0.7% compared to 0.4% for GNR. The returns listed above are net those amounts but nevertheless an important point of consideration.

We'd also expect FTRI to have a larger annual turnover given its strategy of ranking stocks by dividend yields. This means that from one year to another, the composition of the fund will vary greatly compared to GNR which is just based on market capitalization.

The strong point from FTRI is going to be its yield listed at 8.44% which represents a significant advantage to GNR's 4.1% dividend. On this point, FTRI pays quarterly while GNR shareholders will have to make do with only a semi-annual distribution.

FTRI Price Forecast

A major market theme in 2023 has been the resiliency of the global economy, defying expectations despite record-high interest rates in the U.S. and other developed countries.

That said, recent mixed indicators including weaker data out of China have once again raised concerns of a looming broader slowdown. A recent rebound in the U.S. Dollar has also worked to pressure commodities.

In our view, this recent weakness represents a buying opportunity with natural resource producers offering good value at the current level. Recognizing that the factors driving different commodity prices are distinct, it's fair to say the group captures similar cyclical global macro exposures.

The way we see it playing out is that favorable inflation data over the next few months should ease fears against further monetary tightening by the Fed and other Central Banks. Entering 2024, an environment where macro growth expectations are recovering led by a resurgence in emerging markets, could be positive for commodity prices as a tailwind for the FTRI fund.

Again, if we knew that oil or gold, for example, would outperform significantly going forward then a more industry-specific fund would be a better option. Still, the key to recognize here is that FTRI captures a bit of everything on the commodities side which is important for diversification.

From the FTRI price chart, we like the current level near $12.50 is at an area of technical support that has been held since late 2022. On the upside, it will be important to get some follow-through in higher energy and metals prices as a catalyst for sector equities to gain momentum. We are bullish and have a price target for the fund at $15.00 for the year ahead, implying a potential 25% return including the dividend component.

The risk would be for more concerning deterioration of global macro conditions. A scenario where interest rates and the U.S. Dollar surge significantly higher would likely translate into greater financial market volatility and open the door for a leg lower in FTRI and commodity stocks overall.

For further details see: