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With interest rates around the globe in low single digits, yield-hungry investors face the challenge of finding investment strategies that offer a satisfactory level of income. According to Trading Economics, there are currently around 50 countries that have an interest rate of 1% or below1. For many of the larger economies (including Australia), it is well below that, some even in negative territory!
This presents the question to investors – how do I find diversified investment strategies that can still offer decent yields?
Let’s look at three strategies that may be of interest.
1. Fixed Income
For the more risk-averse investor, there are several fixed income investment exposures available that offer attractive monthly income returns and tend to be more capital stable than shares. The chart below summarises the BetaShares range of fixed income and hybrid funds, with associated yields.
Source: Bloomberg, BetaShares, RBA. Past Performance is not indicative of future performance. Yield will vary and may be lower at time of investment. Bonds and hybrids have relatively higher risk compared to cash deposits. Yield does not take into account fund fees and costs.
1 12-month distribution yield. Yield will vary and may be lower at time of investment.
2 Yield-to-maturity. Total expected return from the portfolio if bonds are held to maturity or until called. If bonds have options embedded, this yield is equivalent to yield-to-worst. Assumes no change in benchmark risk-free yields and may vary over time.
3 Running yield, inclusive of franking. Not all investors will be able to obtain the full benefit of franking credits.
One of the historically higher-yielding strategies, the BetaShares Australian Corporate Bond ETF (ASX: CRED), gives investors exposure to a portfolio of senior, fixed rate, investment grade Australian corporate bonds. As at 1 September 2021, CRED offered a yield to maturity of 2.28% and roll yield of 1.12% – this represents a total yield of 3.40% p.a. Further, for investors who may be looking to invest in Australian government bonds, AGVT offered a total yield of just over 2% as at 1 September 2021.
2. Hybrid securities
Hybrid securities typically offer attractive franked income returns for usually only moderate levels of capital volatility. As such, and especially in these times of very low yields, they offer a potentially useful additional source of income and diversification in many investor portfolios. Hybrids are typically floating rate in nature, so will generate increased income in the event that interest rates rise.
Betashares currently has two strategies that provide exposure to hybrid securities.
HBRD aims to provide investors with attractive income returns from an actively managed, diversified portfolio of primarily hybrid securities.
Current yield (net running yield): 2.5% p.a.2
Current gross yield (including franking credits): 3.5% p.a.3
Key features of the fund
- Actively managed by Coolabah Capital
- Ability to rotate across the capital structure (into hybrids, bonds, and cash)
- Aims to purchase ‘mispriced’ hybrids at a low price and sell them at a higher price
BHYB aims to track the performance of an index (before fees and expenses) that provides exposure to a portfolio of listed hybrid securities issued by Australia’s ‘Big 4’ banks.
Current yield (net running yield): 2.3% p.a.2
Current gross yield (including franking credits): 3.3% p.a.3
Key features of the fund
- Passively managed – i.e. will always hold hybrid securities, does not hold bonds
- Only holds hybrids issued by the Big 4 Australian banks
- Low fee
There are some efficient equities-focused strategies that can be utilised to target the income factor. The BetaShares Global Income Leaders ETF (ASX: INCM) has been designed to help Australian investors achieve diversification via global shares while still focusing on strong income returns. The fund holds 100 high-yielding global companies with strong track records of paying regular dividends. To be included in the fund’s portfolio, companies must:
- have had positive earnings over the previous year
- have paid regular dividends over the past three years
- have a dividend payout ratio of no more than 80%, and
- not exceed prescribed volatility thresholds.
With a current 12-month distribution yield of 3.2% (as at 31 August 2021)4, INCM also offers a diversified source of income for investors beyond the Australian market.
While the current low interest rate environment presents challenges to investors seeking income, there are options. As always, consider your financial goals, both long and short term, and your risk appetite, in deciding which option may suit your needs.
There are risks associated with investments in the BetaShares Funds, including:
The value of an investment and income distributions can go down as well as up. Before making an investment decision investors should consider the relevant Product Disclosure Statement, available at www.betashares.com.au, and their particular circumstances, including tolerance for risk, and obtain financial advice.
*Roll return is an estimate only, assuming no change in yield curve over the next 12 months. Roll returns are extra income generated over time through the process of maintaining a bond portfolio at relatively steady target average term-to-maturity. This process requires selling bonds over time as their term to maturity shortens and replacing them with bonds at a longer desired term-to-maturity. As shorter duration bonds typically trade at a price premium to longer duration bonds (as the prices of the former tend to be less volatile as they are less sensitive to interest rates changes), this trading activity may result in extra income or “roll return” over time. Roll return is not assured and may in certain circumstances be zero or negative.
2. Average yield (weighted by market value) of the hybrids portfolio, divided by the current market price of the securities. Provides an indication of expected current income return from making an investment at market price. This value will vary over time.
3. Average estimated gross yield (weighted by market values and inclusive of franking credits) of the hybrids in the portfolio, divided by the current market price of the securities. Provides an indication of expected current income return from making an investment at market price. This value will vary over time. Not all investors will be able to obtain the full value of franking credits.
4. Yield figures are calculated by summing the prior 12 month per unit distributions divided by the closing NAV per unit. Past performance is not an indicator of future performance.