5 Betashares funds for income-seeking investors

With inflation in Australia soaring to its highest level since the 1990s, investors are seeking ways to protect their wealth.

One strategy to offset the sting of rising prices is to invest in exchange-traded funds (ETFs) and exchange-traded products (ETPs) that seek to generate higher yields.

To that end, there are a number of Betashares funds that could be considered by such investors seeking attractive yields. However, it’s important to consider whether income levels can be maintained in an environment of high inflation and rising interest rates.

1. Betashares Australian Top 20 Equity Yield Maximiser Fund (managed fund)

• ASX code: YMAX
• Asset class: Australian shares
• Average 12-month distribution net yield (over 5 years to 31 August 2022)¹: 8.79% p.a.
• Distribution frequency: Quarterly
• Management fee and costs: 0.69% p.a.

1.The fund’s 12-month distribution yield as at each quarter end during the 5-year period to 31 August 2022, averaged over the period, where 12-month distribution yield is the sum of the prior 12-month per unit distributions divided by the closing net asset value per unit as at the end of the relevant quarter. Actual yield will vary with market conditions, including the level of dividends paid by portfolio companies, market volatility and changes to the fund’s capital value. Yield may be lower at the time of investment.

For many income-oriented share investors, the desire for yield also comes with the desire for exposure to well-known companies in the stock market.

YMAX aims to achieve that objective by implementing what’s known as a covered call strategy over Australia’s 20 largest companies, including BHP, Commonwealth Bank, CSL and Woolworths.

By selling (writing) call options, YMAX receives option premiums which provide an additional source of income on top of dividends and franking credits. The end-result is a yield that’s generally expected to be higher than a typical Australian share market ETF. Investors should be aware that by selling call options, any upside return is capped at the strike price of the call options, and the strategy can be expected to underperform in strongly rising markets.

Due to its focus, investors should expect most, if not all, of YMAX’s total returns to be in the form of income rather than capital.

Why is the yield on this fund attractive?

YMAX seeks to achieve a higher yield through both the dividends paid by the companies in the portfolio, and the income generated by selling options over those companies.

Yield environment

YMAX’s yield has remained relatively high throughout its history, even during the COVID lockdown period when many companies cut their dividends. If market volatility increases, this typically increases the income generated by selling options, which can help offset any reduced dividends. For these reasons, YMAX’s distributions have the potential to remain above-market in such conditions.

2. Betashares S&P 500 Yield Maximiser Fund (managed fund)

• ASX code: UMAX
• Asset class: US shares
• Average 12-month distribution net yield (over 5 years to 31 August 2022)¹: 6.03% p.a.
• Distribution frequency: Quarterly
• Management fee and costs: 0.79% p.a.

1. The fund’s 12-month distribution yield as at each quarter end during the 5-year period to 31 August 2022, averaged over the period, where 12-month distribution yield is the sum of the prior 12-month per unit distributions divided by the closing net asset value per unit as at the end of the relevant quarter. Actual yield will vary with market conditions, including the level of dividends paid by portfolio companies, market volatility and changes to the fund’s capital value. Yield may be lower at the time of investment.

The sister fund to YMAX also aims to achieve attractive income, but with a covered call strategy over the S&P 500 Index.

The S&P 500 is generally known for high growth and low dividends. But UMAX allows Australian investors to generate additional income via the selling of call options, whilst at the same time providing access to the largest American companies including Apple, Microsoft, Berkshire Hathaway and NVIDIA.

From its inception in September 2014 to 31 August 2022, UMAX has provided an annual return of 9.23% (after fees and costs), with the yield from the covered call strategy making up a large component of this return. Of course, it’s important to keep in mind that past performance isn’t indicative of future performance. Also, similar to YMAX, investors should be aware that by selling call options, any upside return is capped at the strike price of the call options, and the strategy can be expected to underperform in strongly rising markets.

Why is the yield on this fund attractive?

Like YMAX, UMAX achieves its yield through both dividends and selling options. However, UMAX has tended to generate a higher proportion of its returns from selling options as the overall dividend yield on the S&P 500 Index typically has been lower than the dividend yield of the 20 largest ASX-listed companies.

Yield environment

The combination of option premiums and company dividends is expected to allow for UMAX to maintain an attractive distribution yield even in the face of market volatility.

3. Betashares Australian Composite Bond ETF

• ASX code: OZBD
• Asset class: Australian fixed income
• Yield-to-maturity¹: 4.51% p.a.
• Distribution frequency: Monthly
• Management fee and costs: 0.19% p.a.

1. As at 5 October 2022. The annualised total expected return of the fund if underlying bonds are held to maturity and do not default, and the coupons are reinvested. Assumes no change in interest rates. Yield does not take into account ETF fees and costs. Subject to change over time.

For much of the last decade, fixed income was out-of-sight and out-of-mind for many investors due to plummeting yields on bonds. But that story has shifted this year with a surge in interest rates.

The Betashares Australian Composite Bond ETF currently offers an attractive yield to maturity and its bond portfolio is viewed as “high quality” given an average credit rating of “AA” (noting ratings are opinions only and subject to change). The fund is diversified with over 70% of the fund invested in government, state, and supranational bonds, and the balance in higher quality investment grade corporate bonds for additional income.

Why is the yield on this ETF attractive?

Bonds are selected based on their yield characteristics subject to certain key risk constraints, and have the potential to result in a higher average yield than a benchmark market cap-weighted fixed income index. In addition, central banks have raised interest rates in response to surging inflation, and bond yields reflect future interest rate and inflation expectations.

Yield environment

Bond yields have tended to react to macro-economic conditions, but Australian bond yields in general may remain elevated against a backdrop of higher inflation and central bank action to contain inflation by increasing interest rates.*

4. Betashares Australian Major Bank Hybrids Index ETF

• ASX code: BHYB
• Asset class: Australian hybrids
• All-in yield¹: 5.39% p.a.
• Distribution frequency: Monthly
• Management fee and costs: 0.35% p.a.

1. As at 5 October 2022. The sum of a floating rate security’s discount margin and its reference benchmark rate. Does not take into account ETF fees and costs. Subject to change over time.

Australian investors have long had an appetite for bank hybrids. Yields on this asset class have increased due to rising interest rates, given that hybrid coupons are usually referenced to a floating benchmark interest rate.

BHYB offers a way for investors to generate monthly income by tapping into a portfolio of hybrids issued by the ‘Big 4’ Australian banks. The hybrids held in BHYB have the added benefit of franking credits (not all Australian investors will be able to receive the full value of franking credits).

Additionally, hybrids historically have exhibited relatively low correlation to equities, and have generally shown lower drawdowns during market declines.

Why is the yield on this ETF attractive?

As the name implies, hybrids display characteristics of both equities and bonds. While they offer a coupon (like a bond), their risk level is higher than a bond. As a result, they typically offer higher yields to compensate for this risk. These coupons are usually referenced to a floating benchmark interest rate and, as a result, have also increased recently due to higher interest rates.

Yield environment

Issuers of hybrids may seek to prioritise the payment of hybrid coupons over dividends to equity holders. In addition, recent increases in coupon levels due to rising reference interest rates may remain in place in response to elevated inflation and expected central bank actions.*

5. Betashares Australian Investment Grade Corporate Bond ETF

• ASX code: CRED
• Asset class: Australian fixed income
• Yield-to-maturity¹: 5.95% p.a.
• Distribution frequency: Monthly
• Management fee and costs: 0.25% p.a.

1. As at 5 October 2022. The annualised total expected return of the fund if underlying bonds are held to maturity and do not default, and the coupons are reinvested. Assumes no change in interest rates. Does not take into account ETF fees and costs. Subject to change over time.

CRED offers monthly distributions and exposure to a portfolio of higher quality investment grade corporate bonds issued in Australian Dollars. Corporate bonds are generally expected to pay higher income than government debt. CRED invests in up to 50 bonds, including those issued by the National Broadband Network (NBN Co Ltd), Coles, and Transurban.

Eligible bonds are ranked by yield above benchmark (being a Commonwealth Government bond of similar maturity) and each issuer is capped at a 7% maximum weighting at each rebalance date. Through this process, the fund seeks to avoid over-exposure to any one company.

Why is the yield on this ETF attractive?

CRED holds investment grade corporate credit, which typically offers a higher level of income than government bonds. In addition, the bond selection process takes into consideration the yield offered by that issuance.

Yield environment

CRED generates income from senior ranking securities of investment grade quality. Bond yields have tended to react to macro-economic conditions, but Australian bond yields in general are expected to remain elevated against a backdrop of higher inflation and central bank action to contain inflation by increasing interest rates.*

Summary

Recent market events and buoyant conditions in certain sectors have created opportunities for income-seeking investors to invest in funds with attractive yields. Before taking the plunge, be sure to do your due diligence and understand how the fund generates income and whether its yield is sustainable in the current environment.

* Important note: If bond yields fall, this will create capital gains for bond holders. Conversely, if bond yields rise further, this will create capital losses for bond holders. As demand for bonds increases, this drives prices up, and yields down. Investors should be aware that macro conditions and central bank actions can impact the interest rate environment at any stage.