Four high-yielding investment options compared

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Investors seeking steady returns and good yields in the share market have had new investment opportunities open up in recent years with the advent of exchange trade funds (ETFs). In this column I have regularly reviewed different investment themes and money making opportunities with the local ETF sector, ranging from sector rotation to international exposure.

ETFs strongest benefit is their relative cost. For a fraction of the cost of most actively managed funds, investors can get exposure to indices that track established benchmarks such as the S&P/ASX 200 (State Street’s STW) or S&P/ASX 300 (Vanguard’s VAS). Their management expense ratios are 0.29% and 0.15%, respectively.

We’ve also looked at so-called ‘strategy based’ ETFs, such the suite of high-dividend-yield products available. For only a fraction more in management fee, these ETFs aim to select stocks from within the large cap and most liquid end of the market that are most likely to produce reliable and above-average dividend yields. Ideally, such ETFs might produce capital returns broadly in line with the market over the long-run, though with the added benefit of a higher dividend yield. As such, these products are well suited to investors seeking regular tax effective income.

Four main options

So much for the theory. It’s been just over a year since I last reviewed the high-yield ETF sector. In that time there’s been no new players enter the market, meaning we still have four providers: State Street, Vanguard, iShares and Russell Investments.

Back then I suggested that “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… it’s also the cheapest high-income ETF and has relatively greater defensive qualities given its higher weight to consumer staples rather than financials.”

Which one should you buy?

How have these investments fared?

As seen in the table below, Vanguard remains the cheapest ETF with a management expense ratio of only 0.25%, though the others (with the possible exception of Russell) are not much more expensive. Russell has the oldest high-dividend ETF and retains the most funds under management (FUM) – though the other funds have increased FUM and market share relative to Russell over the past year. Measures of liquidity – such as bid/offer spreads and market depth – have improved to fairly good levels for all these ETFs.

Sector exposures – reflecting the respective methodologies of these providers – remains similar to last year, with a generally higher than market weight to the financial sector. As we noted last year, Russell’s ETF is the only one that invests in listed property, while iShares tends to underweight financials so as to provide investors greater diversification to other sectors. Vanguard is also relatively underweight financials, with the major difference made up with a larger overweight to telecommunications.

In terms of performance over the year, all have managed to produced a higher than market average dividend return. Capital returns have also been above average, reflecting the market preference for high yielding sectors in the past year – such as financials – rather than materials or consumer discretionary stocks.

These sector performances appear to have especially hurt the performance of iShares’ ETF given its higher weight to materials, and aided the performance of Vanguard (despite an underweight financials exposure) due to the strong performance of telecommunications.

My pick

Overall, on the basis of both relative cost, liquidity and performance, the Vanguard ETF still remains my most favoured. Given its solid performance over the past year, my call last year so far remains vindicated.

Important: 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. Consider the appropriateness of the information in regards to your circumstances.

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