FTRI - FTRI: ETF With 8% Yield To Bet On Commodities

2023-04-21 08:00:00 ET

Summary

• First Trust Indxx Global Natural Resources Income ETF holds 50 global stocks, mostly in materials and energy.
• The portfolio is quite concentrated in a few countries, industries and holdings.
• This fund may profit by inflation.
• Both price and distributions are very volatile and correlated with commodities.

FTRI strategy and portfolio

First Trust Indxx Global Natural Resources Income ETF ( FTRI ) has been tracking the Indxx Global Natural Resources Income Index since 3/11/2010. As of writing, it has 50 holdings, a 12-month distribution yield of 8.05%, 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 68% of asset value. North America is the heaviest region (36% of assets), followed by Asia (24%) and Latin America (18%). The top five countries are the U.S. (22.9%), Australia (15.4%), Brazil (14.4%), the U.K. (13.5%) and Canada (13%). Other countries are below 5% individually and 21% in aggregate. The next chart plots the top 10 countries, representing 95% of asset value.

The portfolio is concentrated in basic materials (57.5%) and energy (28.6%). The heaviest industries are metals/mining (39.7%) and oil/gas/fuel (27.3%).

Regarding valuation ratios (reported in the next table), FTRI is cheaper than two related U.S. sector benchmarks: Materials Select Sector SPDR Fund ( XLB ) and Energy Select Sector SPDR Fund ( XLE ). These metrics may be biased by the geographical allocation: aggregate P/E ratios are lower in Australia, Brazil, the UK and Canada than in the U.S.

The portfolio is quite concentrated in the top 10 holdings, which represent 62.4% of asset value. They are listed below with some fundamental ratios. Each of the top 4 names weighs between 6% and 10%. Risks related to other holdings are moderate.

* The fund holds stocks in the primary exchanges, not these US tickers.

FTRI vs. competitors

The next charts compare total returns of the fund and five other non-hedged international dividend funds: Schwab Fundamental International Large Co ETF ( FNDF ), Invesco FTSE RAFI Developed Markets ex-U.S. ETF ( PXF ), First Trust Dow Jones Global Select Dividend ETF ( FGD ), SPDR S&P Global Dividend ETF ( WDIV ), MSCI EAFE High Dividend Yield Equity ETF ( HDEF ).

FTRI has lagged them by far since 2014, but beats all of them in the last 5 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 been trending down, and FTRI has followed them (next chart).

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

Takeaway

First Trust Indxx Global Natural Resources Income ETF holds 50 international high-yield stocks, mostly in materials and energy. More than one third of asset value is in the U.S. and Canada, and less than one third is in emerging markets. The portfolio is quite concentrated: more than one third of asset value is in 4 companies. Past performance looks correlated to commodity prices. The 10-year dividend growth rate is great, but distributions collapsed twice with oil price.

FTRI is a good choice for investors seeking a fund whose capital and distribution are likely to resist inflation better than the broad market. However, both price and distributions are very volatile and correlated with commodities.

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