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An ETF That Emphasizes Risk-Adjusted Income


Exchange traded funds that can deliver income to yield-starved investors continue to proliferate with some thriving. That much has been highlighted by the roughly $8 billion investors have allocated to dividend ETFs this year.

With interest rates low, an array of income-generating sectors and asset classes flourished this year. That group includes the usual suspects such as real estate investment trusts and utilities. Due to their mixed exposure to asset classes that are often rate-sensitive, multi-asset ETFs have also proven durable and there is a new addition to that group. [Multi-Asset ETFs Get Interest Rate Relief]

The actively managed First Trust Strategic Income ETF (FDIV) debuted earlier this month as new income-generating tool through positions in various asset classes, including high-yield bonds and senior loans, mortgage-related securities, preferred securities, international sovereign bonds, master limited partnerships (MLPs) and energy infrastructure companies, and dividend stocks. [First Trust Debuts Strategic Income ETF]

FDIV joins the F irst Trust NASDAQ Multi-Asset Diversified Income Index Fund (MDIV) and the First Trust International Multi-Asset Diversified Income Fund (YDIV) as the firm’s marquee multi-asset offerings.

Like its older family members, FDIV blends several other ETFs with common and preferred stocks, partnerships and trusts to form the ETF’s lineup of 135 holdings. In fact, FDIV’s top-five holdings, a group that represents 34.5% of the ETF’s weight, are all other ETFs.

That group is comprised of th e First Trust Senior Loan Fund (FTSL) , iShares Emerging Markets Local Currency Bond ETF (LEMB) , First Trust Preferred Securities and Income ETF (FPE) , iShares J.P. Morgan USD Emerging Markets Bond ETF (EMB) and the iShares MBS ETF (MBB) .

Several new ETFs that have debuted this year have adopted the ETF fund of funds approach.

As is the case with most multi-asset ETFs, there is an element to interest rate sensitivity with FDIV. That is highlighted by the new ETF’s 31.6% combined weight to preferred stocks and high-yield bonds. Preferreds lose allure when rates rise because they must decline in value to make their yields attractive relative to Treasuries. Additionally, most preferred issues or perpetual or feature long durations, which exposes investors to rate risk. [Mind Rate Risk With Preferred ETFs]

FDIV offsets some of that interest rate risk with an almost 26% weight to dividend-paying common stocks, many of which hail from sectors that often prove durable when rates rise. A fair amount of FDIV’s common equity positions hail from the financial services, health care and industrial sectors, groups with penchants for being solid performers in the face of rising interest rates.

The new ETF, which already has $20.2 million in assets under management, charges 0.87% per year.

FDIV Top-10 Holdings


Table Courtesy: First Trust

ETF Trends editorial team contributed to this post. Tom Lydon’s clients own shares of EMB.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.