What is RFDI? (Pros, Cons, and Strategies)

Investors looking to diversify their portfolios with international exposure often turn to ETFs to capitalize on global opportunities. One such ETF is the First Trust RiverFront Dynamic Developed International ETF, commonly known as RFDI. This post will delve into what RFDI is, its key features, advantages, and disadvantages, and the best strategies for investing in it.

What is RFDI?

RFDI is an actively managed ETF that seeks to provide long-term capital appreciation by investing in a diversified portfolio of equity securities from developed international markets. Managed by First Trust in collaboration with RiverFront Investment Group, RFDI aims to identify and invest in high-quality companies across various sectors in developed markets outside the U.S.

Key Features of RFDI

• Geographic Diversification: RFDI focuses on developed markets outside the U.S., including countries in Europe, Asia, and the Pacific region.
• Active Management: Unlike passive ETFs that track an index, RFDI is actively managed, which allows for a dynamic approach to selecting securities based on market conditions and fundamental analysis.
• Quality Criteria: The ETF focuses on companies with strong balance sheets, robust earnings, and potential for growth.

RFDI Composition

RFDI's portfolio includes companies from various sectors such as technology, healthcare, financial services, and consumer goods. The fund managers employ a top-down macroeconomic analysis combined with a bottom-up company selection process to build a diversified portfolio. This approach helps to mitigate risks associated with individual investments and enhance the fund's resilience during market fluctuations.

Pros of RFDI

Geographic Diversification

One of the main advantages of RFDI is its geographic diversification. By investing in developed international markets, RFDI provides exposure to various economic environments, potentially reducing risk compared to a portfolio concentrated in a single country.

Active Management

The active management style of RFDI can be advantageous in volatile markets. The fund managers can make tactical adjustments to the portfolio based on market conditions and economic indicators, potentially leading to better performance compared to passive investment strategies.

Quality Investments

RFDI focuses on companies with strong fundamentals such as solid earnings, high return on equity, and low debt levels. This emphasis on quality can result in more stable returns and reduced exposure to poorly performing companies.

Dividend Income

Many of the companies in RFDI's portfolio pay dividends, providing investors with a steady income stream. This can be particularly appealing for those seeking regular income in addition to capital appreciation.

Cons of RFDI

Higher Expense Ratio

RFDI's active management comes with higher fees compared to passive ETFs. The expense ratio for RFDI is typically higher, which can eat into investment returns over the long term.

Market Timing Risks

Active management also introduces the risk of poor market timing decisions by the fund managers. While the goal is to outperform the market, there is no guarantee that the managers' decisions will always be beneficial.

Currency Risk

Since RFDI invests in international markets, currency fluctuations can impact the fund's performance. Changes in exchange rates between the U.S. dollar and foreign currencies can either positively or negatively affect returns.

Lower Liquidity

Compared to popular domestic ETFs, RFDI might have lower trading volumes, leading to higher bid-ask spreads. This can result in increased costs for investors when buying or selling shares.

RFDI Investment Strategies

RFDI offers a range of opportunities for investors looking to diversify their portfolios with international equity exposure. Here are some strategies to consider:

Long-term Investment Strategy

Given its focus on high-quality companies and geographic diversification, RFDI is well-suited for long-term investment horizons. Investors looking for steady growth and diversification outside the U.S. should consider holding RFDI for at least 5-10 years to capitalize on its potential for capital appreciation and dividend income.

Dollar-Cost Averaging

Investors can employ a dollar-cost averaging strategy by regularly purchasing a fixed dollar amount of RFDI. This approach can help mitigate the impact of market volatility and reduce the risk of making poorly timed investment decisions.

Income Generation

RFDI can also be part of an income-generating strategy due to its focus on dividend-paying companies. Investors looking for regular income can benefit from the dividends paid by the companies in the ETF's portfolio. Reinvesting these dividends can further enhance the compounding effect over time.

Risk Mitigation through Diversification

Adding RFDI to an existing portfolio can provide geographic and sector diversification, potentially reducing overall portfolio risk. This strategy is particularly useful for investors heavily invested in U.S. stocks who wish to diversify their risk exposure.

In summary, RFDI is a compelling option for investors seeking international diversification with an actively managed approach. While it comes with certain risks and higher costs, its focus on quality investments and potential for capital appreciation make it a valuable addition to a long-term investment strategy.