Question 1: 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?
Answer: 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 market 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 allow the fund to pay a higher income distribution to its unitholders. 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, its overall return since inception (which includes the income) is 4.00% compared to the Australia 20 index performance of 6.86% – a massive 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).
Question 2: Referring to James Dunn’s excellent article on biotech companies, what is the best way to invest broadly in this field?. Other than HLTH, are there any other ETFs, LICs or Funds?
Answer: It is very hard to invest broadly domestically because the companies tend to be small and there is a high failure rate. Further, because the products typically have a global audience and long lead times from idea to commercialisation, very deep pockets are required. The model for most Australian biotech firms is to develop the product and then sell that (and the IP) to a global healthcare company to commercialise and distribute.
On the ASX, the nearest I can find is CURE from ETF Securities (this tracks the US S&P Biotechnology Index). HLTH from Van Eck and DRUG from Betashares are focussed on global healthcare leaders.
One company who you might want to talk to is the IQ Group Global, who “find, fund and develop bioscience discoveries to create life-changing medical innovations”.
Question 3: I would like to get your thoughts on PushPay’s (PPH) latest mid-year results. They have again upgraded their guidance but it was worrying they did not add a single customer over the period. Cross selling has been greatly beneficial for the growth and revenue of the company. It would be great to see what you all think of Pushpay at the moment, with a shift from technology to the reopening trade.
Answer: I think you nailed it. The company marginally upgraded guidance, but added zero net customers in the last six months. The re-opening trade may also work against them (or slow the acceleration to digital giving). The brokers are mixed on the stock (1 buy, 2 neutrals, 1 sell). According to FN Arena, the consensus target price is around $7.40, about the same as the ASX market price of $7.30.
Question 4: Can you please advise the best way to get exposure to 5G? Is there an ETF that specifically covers 5G
Answer: The only way I can think of getting exposure is through Telstra, which is highly indirect. I do not know of any ETFs. I will ask our readers for other stocks/ideas. Readers – can you help please?
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