FTHI ETF: Beating Peers Lately, But Yield History Is Weird

This article series aims at evaluating ETFs (exchange-traded funds) regarding the relative past performance of their strategies and metrics of their current portfolios. Reviews with updated data are posted when necessary.

FTHI strategy

First Trust BuyWrite Income ETF (NASDAQ:FTHI) is an actively managed fund launched on 1/6/2014. It currently holds 179 stocks and shorts 8 call options on the S&P 500 index. The 12-month distribution rate is 8.36% and the total expense ratio is 0.75%. Distributions are paid monthly.

As described by First Trust, “The Fund’s primary investment objective is to provide current income. The Fund’s secondary investment objective is to provide capital appreciation.” The fund invests in stocks listed on U.S. exchanges and sells call options on the S&P 500 Index to collect premiums that may be distributed to shareholders. Little information is given about the stock picking methodology, except that it uses “a mathematical optimization process which attempts to favor higher dividend paying common stocks”. The call options are written at-the-money or slightly out-of-the-money, and laddered with expirations shorter than one year. The fund may also write call spreads in certain circumstances. As a guideline, the notional value of calls written should stay between 25% and 75% of asset value (taking option leverage into account). As of writing, the options held in the portfolio expire in March and April with strike prices between SPX 4800 and 5200.

FTHI portfolio

FTHI invests mostly in U.S.-based companies (92% of asset value). The sector breakdown is not much different from the S&P 500 (SPY), except it significantly overweights consumer staples, energy, and underweights industrials. Technology is the heaviest sector (26.2%), but not so heavy as in the large cap benchmark (30.2%).

FTHI is significantly cheaper than the S&P 500 regarding the usual valuation ratios, as reported in the next table. Growth metrics are similar.

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Data: Fidelity

The top 10 issuers, listed below with fundamental metrics, represent 33.2% of asset value. For convenience, the two stock series of Alphabet are grouped in the same line of the table. The top three names, Apple, Microsoft and NVIDIA, weigh about 17% in aggregate. Risks related to other individual companies are low.

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Performance

FTHI has underperformed the S&P 500 by over 140 percentage points in total return since its inception in January 2014, as plotted on the next chart.

In fact, price return is only about 11% in 10 years:

In the same time, the cumulative inflation has been about 32% (based on CPI), resulting in a material loss of capital measured in inflation-adjusted value (excluding distributions considered as an income stream).

FTHI dividend depends on market conditions and effectiveness of the option strategy. The annual sum of distributions was quite stable between $0.93 and $1 per share from 2015 to 2021, then it surged to $1.75 in 2022 (+82.3% in one year) and increased again to $1.82 in 2023. The total dividend growth rate looks great (+147% in 9 years), but the distribution history (plotted on the chart below) leaves me skeptical about the sustainability of the current yield.

Competitors

The next table compares characteristics of FTHI and five other ETFs implementing buy-write strategies (buying stocks and selling call options):

• Global X NASDAQ 100 Covered Call ETF (QYLD)
• Amplify CWP Enhanced Dividend Income ETF (DIVO)
• Global X S&P 500 Covered Call ETF (XYLD)
• JPMorgan Equity Premium Income ETF (JEPI)
• First Trust Nasdaq BuyWrite Income ETF (FTQI)

FTHI has the highest fee, on par with FTQI. It is the second smallest (in assets) and less liquid (in dollar volume) of these funds. Once again, dividend metrics must be taken with a grain of salt for all buy-write funds due to the variability of distributions.

The next chart compares total returns, starting on 5/26/2020 to match all inception dates. DIVO is leading, followed by JEPI, and FTHI is in third position.

Nevertheless, FTHI is the best performer over the last 12 months, almost tied with QYLD.

Takeaway

First Trust BuyWrite Income ETF is an actively managed fund with a portfolio of 179 stocks and rolling short positions in S&P 500 call options. The sector breakdown is quite close to the S&P 500 Index, yet valuation looks more attractive. FTHI has lagged the equity benchmark by far since inception, and performance has been average relative to peers over the last 3 years. Nevertheless, it has been outperforming for 12 months. The fund meets its primary objective of providing income, although distribution history raises a doubt about yield sustainability. As for the secondary objective of capital appreciation, price is up about 11% in 10 years, pointing to a decay in inflation-adjusted value.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.