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I have a term deposit coming due and am looking to invest for ongoing income. I note Betashares ETFs EINC and YMAX appear to offer good franked yields. The notes advise that EINC invests in an actively managed portfolio of income-oriented Australian shares, but does not use derivatives. By contrast YMAX seeks to enhance dividend income through a ‘covered call’ strategy. Can you explain the ‘covered call’ strategy and comment on the risk profile of this.
A: A covered call strategy involves writing a put option and receiving a premium for doing so. For example, assume the ETF owns CBA shares. It writes a put option at (say) $75.00, which is higher than the current price. If it is never exercised, it just pockets the premium. If it is exercised, it sells the shares at $75.00, plus keeps the premium. It might argue that it was happy to sell CBA shares at $75.00. Obviously, if CBA keeps rising, it is going to look a little silly.
If a covered call strategy is done professionally and consistently, it can potentially gross up the return on the portfolio of stocks – and pay a higher income distribution to its unit holders. That’s the theory at least.
I am not a fan of “Equity Income” funds of this nature. YMAX, which is the BetaShares Australian Top 20 Equity Yield Maximiser Fund, has underperformed since inception. While it has paid a higher income, it’s overall return since inception (which includes the income) is 4.00% compared to the Australia 20 index performance of 6.86% – an underperformance of 2.86% pa. In a relative sense, it has done a little better over the last 12 months to 30 September (-10.22% vs the index return of -10.13%), but this is nothing to write home about. Pass.
I would be more comfortable with EINC (BetaShares Legg Mason Equity Income Fund) or the Switzer Dividend Growth Fund (SWTZ), but these are traditional equity funds and may not be a direct substitute for your term deposit (unless you want to increase your allocation to growth assets).
