RYLD - RDVI: Add It To A Watchlist And Consider These

2023-09-03 10:23:04 ET

Summary

• RDVI is an interesting ETF to monitor because of its methodology and attractive monthly distributions.
• However, its high fees and short track record are discouraging.
• Consider adding it to a watchlist for now and take a look at the alternatives mentioned in this post.

Thesis

FT Cboe Vest Rising Dividend Achievers Target Income ETF (RDVI) is an actively managed income-focused ETF that attempts to deliver a superior yield to that of the S&P 500 index. While I believe that its approach is interesting and appears promising, the fees are high and with its very short run, I cannot really be bullish on it yet.

In this post, I want to give you an overview of its strategy, fees, risks, and performance before you make any investment decision in relation to it. I will also mention a few alternatives that I think are better options for now due to their longer track records and lower fees.

Overview

RDVI is a recently launched ETF that focuses on generating income from dividend stocks and writing calls with distributions made on a monthly basis. More specifically, it will buy stocks that are included in the Nasdaq US Rising Dividend Achievers Index; these range from small to large-cap companies that are known to have been increasing their dividend payments and that are conservatively capitalized and likely to continue growing their earnings. Though the fund managers will hold the ~50 stocks that belong to the index, they are free to distribute the portfolio weights as they see fit to accomplish their objective.

Speaking of which, the ETF aims to make distributions at an annual rate of approximately 8% over the "current" annual dividend yield of the S&P 500 Index. Writing call options is supposed to help them generate some extra income required to accomplish that goal.

RDVI aims to sell calls on the S&P 500 Index, which are expected to be cash-settled only on the expiration date, as well as calls on underlying ETFs that will be physically settled at any time prior to the expiration date. Additionally, such options will have an at-the-money strike price and expirations of less than 30 days.

This is an interesting approach. Contrary to other ETFs, this one doesn't focus on a balance between giving you exposure to a broad-market index with a monthly income generated from writing covered calls on the securities included in it. Its main focus is on providing superior dividend/premium returns and at the same time separate the sources of them; it uses different indices for those two different income streams.

Allocations

As you can see from the top holdings of RDVI, the allocations are very conservative and don't reflect a market-cap-weighted portfolio. That's good in my book. I find a market-cap bias to be strange for sophisticated ETFs like this one.

My problem is that the find is heavily tilted towards Financial companies. This makes sense considering the higher yields that such stocks would provide, but I find this exposure very high.

Cost

Though the ETF is very fresh, its daily volume seems adequate. Turnover is nonexistent precisely because of how new it is. The only thing I want to comment on is the high expense ratio.

It's understandable that expenses would be high for an actively managed fund that is engaged in options writing. That said, the area is very competitive for you to ignore it. You can find cheaper ETFs with attractive yields that have been in operation for much longer (as we'll see in the next section).

Performance

Since its inception, RDVI has returned 21.33%, including distributions. But this is such a short period that I cannot put much weight into it. Only time will tell if they can deliver attractive income without sacrificing market price returns.

Regarding income, the distribution rate is 8.8% as of July 31, 2023. It's also too early if this is sustainable. However, the distributions are monthly so we have a decent record so far:

Regardless, I would like to see RDVI under more market environments to better appreciate such consistency.

For now, I believe that the go-to options for someone seeking a sustainable high yield from a call writing strategy with a monthly distribution are the ones below:

The Global X NASDAQ 100 Covered Call ETF ( QYLD ) and Global X Russell 2000 Covered Call ETF ( RYLD ) charge 0.6% and manage billions. They just focus their buy/write strategies on different indices. The First Trust BuyWrite Income ETF ( FTHI ) charges 0.8% and manages about $250 million.

Risks

The most important risk I want to emphasize is the possibility of capital erosion after excluding distributions. The yield is high enough and distributions may be sustainable in the future. However, some investors may think that they will be able to preserve their capital without reinvesting at least some portion of their received distributions. This can end badly as many ETFs in the space manage to deliver high dividends as well as proceeds from writing options while their market prices have been on a downward trend for a long time. Caution is advised here.

Another risk that you should know is related to the high exposure to the Financials sector that RDVI has right now. Companies in the sector can be insurers, banks, and corporations offering financial services; these are especially sensitive to interest rate and exchange rate changes, as well as regulations by the government.

The two other risks are more general ones which such ETFs share. One has to do with writing calls; specifically the American-style options on ETFs that are physically settled, because the holders of them can exercise the option any time before the expiration date. There is a variety of factors that can influence such a decision and make exercising more likely. The other risk has to do with the equity positions. RDVI is first and foremost an equity fund, which makes it subject to the risks that come with owning a variety of equities, some related to a specific industry, others to the financial situation of the issuer, etc.

For a more exhaustive list of the risks involved with investing in RDVI, please read the relevant prospectus .

Verdict

I think that RDVI is an interesting ETF to watch. It was launched by an institution with more than 30 years of experience, which delivers a great variety of ETFs, mutual funds, CEFs, among others. I find the expense ratio a bit high for my taste, however. Given the fact that it can't compete on fees, it can't compete on anything else except a different approach to income-focused investing. We'll certainly have to see how it goes. It's too early to call its yield sustainable and its overall performance impressive.

For now, I think that you should add this to your watchlist if you're interested and consider QYLD or RYLD as alternative solutions.

What do you think? Is there something that you would like to add here? Please, let me know your thoughts in the comments. As always, thank you for reading.

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