Given growing demand for steadier income returns from those approaching or in retirement, a suite of high-income exchange traded funds (ETFs) have hit the market over the past year.
Using their own proprietary stock selection methodology, these ETFs attach a higher weight to stocks with relatively large and steady dividends – such that each ETF provider aims to match the overall market’s piece returns over time, though with a higher and steadier than average dividend yield.
That compares with the typical capitalisation-weighted ETF – such as State Street’s S&P/ASX 200 SPDR fund (ASX:STW) – that attaches the highest weight to stocks with the highest market capitalisation.
All three of Australia’s major ETF providers, State Street, Vanguard, and iShares have launched their own version of a high-income ETF – with the respective ASX codes of SYI, VHY, and IHD. Russell Investments was in fact the first into this space with its own high income ETF (ASX: RDY) launched in May last year.
So how can we assess these ETFs? There are a number of criteria.
In terms of cost and liquidity, Russell’s RDV is the most expensive with a management expense ratio of 0.46%. That’s almost a quarter of a percentage point higher than the cheapest ETF, provided by Vanguard. In terms of market depth and bid-offer spreads, the four are fairly close according to the latest monthly survey by the Australian Securities Exchange.
Of course, Russell’s ETF has the benefit of being the first to market, and has so far attracted $160 million in funds under management, while Vanguard’s VHY – as the last ETF to hit the ASX – had only $15 million under management at end-October. That said, Vanguard’s ETF is backed by a far larger unlisted managed fund founded in 2000, with $340 million under management.
[1]So far at least, these ETFs have achieved their goal of providing relatively high dividends. While some ETFs are too new to provide full-year results, over the past year Russell’s RDV provided $1.23 in dividends that equated to a 5.3% yield based on the closing price on Tuesday 15 November. State Street’s SYI provided $1.76 per share in dividends, implying a yield also around 5.3% based on Tuesday closing price.
That compares with a yield of 4.2% over the past year for State Street’s S&P/ASX 200 market capitalisation weighted ETF, (ASX: STW).
It should be noted that by chasing yield, these ETFs often end up with sector exposures different to that of the overall market – typically more in financials and consumer staples, which tend of have higher yields. But each provider also differs in the risk limits placed on each sector. These sector differences may be important, depending on the extent of nature of other exposures in your portfolio.
As seen in the table below, the overweight to financials is most evident for State Street’s SYI, while iShares’ IHD uses a methodology that under weights financials, while increasing exposure to industrials. Note also that only Russell Investment (not included in the table below) includes listed property trusts in its higher yield ETF.
[2]In terms of price performance over a comparable period, Vanguard’s VHY has fallen the least in the market correction since mid-year, while Russell’s has fallen the most.
[3]Which one should you buy?
Overall, my choice of ETF for relatively conservative and income needy investors would be Vanguard’s ETF. While this is the newest ETF, it’s backed by a fund that has been operating for the past ten years and achieved an annualised yield of 5.2%. It’s also the cheapest high-income ETF and has relatively greater defensive qualities given its higher weight to consumer staples rather than financials.
Of course, that may also mean this ETF may underperform the overall market during strong bull market periods. But price conservative investors may be willing to pay for steadier yields and greater defensive protection.
Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.
Also in the Switzer Super Report
- Peter Switzer: Warren Buffett and 18 high yielding stocks to buy [4]
- Paul Rickard: Should you buy Origin Energy’s hybrid notes? [5]
- Tony Negline: Should I buy property or contribute to super? [5]
- Charlie Aitken: Two stocks to buy today [6]
- Andrew Bloore: Your responsibilities as an SMSF trustee [7]