RDVI: Dividends Juiced By Options Writing

seekingalpha04-23

FT Vest Rising Dividend Achievers Target Income ETF is an actively managed fund that generates income by writing call options on US exchange-traded assets.RDVI's top holdings include Williams-Sonoma, ...

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However, it has a high expense ratio and sector concentration risks.PM Images Juicing income with options overlays has been all the rage in the ETF world over the past year. You can do this on any investment through writing call options relative to some core position. And that's what the FT Vest Rising Dividend Achievers Target Income ETF (BATS:RDVI) exactly does. RDVI is an actively managed fund that was launched on October 19, 2022. The fund is designed to generate ongoing income for its investors, with a supplementary goal of achieving growth in capital value. Its main investment focus is on equity securities from the United States, specifically those listed in the Nasdaq US Rising Dividend Achievers Index. To further its objectives, the fund implements a strategy involving the writing (or selling) of call options on U.S. exchange-traded assets, either directly on the S&P 500 Index or on ETFs that mirror the performance of the S&P 500 Index. The fund boasts approximately $921 million in total net assets and charges an expense ratio of 0.75%. Unveiling the Top Holdings of RDVI RDVI's portfolio includes 51 holdings, with a maximum market capitalization of $3,126.13 billion. The top five holdings include:   Williams-Sonoma, Inc. (2.15%): An American consumer retail company that sells kitchenware and home furnishings.  Regions Financial Corporation (2.12%): A bank and financial services company that provides retail and commercial banking, trust, securities brokerage, mortgage, and insurance products and services.  Capital One Financial Corporation (2.11%): A bank holding company specializing in credit cards, auto loans, banking, and savings accounts.  Lennar Corporation (2.11%): One of the largest homebuilders in the United States.  Discover Financial Services (2.09%): A direct banking and payment services company known mainly for its credit card offerings.  Notably, these companies are known for their dividend yield, which is what the fund is at its core trying to provide exposure to. A Deep Dive into Sector Exposure RDVI's sector breakdown reveals an overweight concentration in financials (30.52%), followed by industrials (17.71%) and consumer discretionary (14.11%). The fund also has a significant presence in technology (13.34%) and energy (10.73%). ftportfolios.com Peer Comparison: RDVI vs. Similar ETFs I mentioned at the start that options overlay strategies have been all the rage, which of course means there are tons of competitors to look at. RDVI is unique in that it's tracking a dividend-centric index and doing options writing on the S&P 500 itself. Relative to the Global X S&P 500 Covered Call ETF (XYLD) and the Global X S&P 500 Covered Call & Growth ETF (XYLG), RDVI has outperformed over the past year. This is largely due to Tech weakness, which sector wise RDVI has less exposure to, combined with the option writing into recent weakness for the tech-heavy S&P 500. stockcharts.com Evaluating the Pros and Cons of RDVI's Investment Strategy Pros:  Income Potential: RDVI seeks to provide a target level of distributions at an annual rate that is approximately 8.38% (before fees and expenses) over the current annual dividend yield of the S&P 500 Index. ycharts.com  Growth Potential: The fund seeks capital appreciation based on the price returns of the equity securities it holds. Cons:   High Expense Ratio: RDVI charges a relatively high expense ratio of 0.75%, which might eat into the fund's returns.  Sector Overweight: The fund's overweight position in financials might lead to increased risk if this sector faces a downturn.  Deciding Whether to Invest in RDVI  Given its investment strategy, holdings, sector exposure, and peer comparison, RDVI appears to be a promising option for investors seeking current income with the potential for capital appreciation. However, its high expense ratio and sector concentration might give some investors pause. The issue here is that it feels like a mismatch. It's at the core investing in dividend stocks, but generating extra income with options selling on the S&P 500. This means investors are basically making two bets on this fund through two different contributors to total return. That doesn't make this a bad fund, just perhaps a more complicated one. In addition, while there's a time and place for options writing overlays, I'm not sure something like this can outperform straight up exposure to a long only portfolio of high-quality dividend stocks without any options overlay. 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