Outlook Series

4 ETFs that could boost your income in 2024

Tue 16 Jan 24, 9:15am (AEDT)
OS AA Written - ETF Piece - Income - Primary
Source: Livewire Markets

Key Points

  • Australian investors have access to various asset classes for sustainable income beyond traditional high-dividend stocks
  • Four income-focused ETFs, including BetaShares FTSE RAFI Australia 200 and Global X S&P/ASX 200 Covered Call, offer diversified strategies for generating passive income in 2024
  • ETFs like BetaShares Australian Top 20 Equity Yield Maximiser and Global X US Treasury Bond target income diversification through covered calls and US Treasuries

If there is one thing that separates the Australian investor from our global compatriots, it's our obsession with income. The regular payouts, our unique franking credits system, and lifestyle choice are all reasons why investors scan long and hard for those high-dividend paying stocks.

But thanks to rising interest rates and the wider democratisation of investing, investors can now access multiple asset classes to generate a sustainable income.

You don't even have to pick specific stocks anymore - thanks to the rise of products that are designed to pick investments which maximise dividend yield.

The four ETFs we cover below are designed to maximise passive income in 2024. The four products cover a range of asset classes (not just Australian equities) and will feature both Betashares and Global X.

This is the second in a three-part series looking at the opportunities in passive investments, and forms part of Livewire's Outlook Series.

Four income focused ETFs covered

An index with typically higher dividend yield than the ASX200

Betashares FTSE RAFI Australia 200 ETF (ASX: QOZ)

There are various approaches to increasing the income you generate from your equity portfolio, but they often come with drawbacks, as the Betashares team explain:

  • Picking high dividend paying stocks can introduce stock specific risk, in particular risk to capital from a “dividend trap”.

  • Equity income funds which focus entirely or largely on dividend yield may provide greater stock diversification but are often skewed towards the highest yielding sectors.

  • A covered call strategy may outperform in bearish and flat markets, but will tend to underperform in a strong bull market.

And while most stock picking is generally done from a bottom-up lens, there is one product that allows you to gain access to the ASX 200's biggest dividend payers from a top-down perspective.

"QOZ tracks an index of the 200 largest Australian companies – weighted in a way that is reflective of the economic importance rather than the market capitalisation of its constituents," they say.

"Dividends are just one of the fundamental inputs that go into the weighting methodology, but it has historically resulted in an index with a higher dividend yield than the broader market. Not only has QOZ beaten the S&P/ASX 200 Index since the fund’s inception, its net distribution yield over the year to 30 November 2023 was 7.8%," they add.

  • Top five holdings: BHP, Commonwealth Bank, Westpac, ANZ and National Australia Bank

  • Index: FTSE RAFI Australia 200

  • Management costs: 0.40% p.a.

  • Inception date: 10 Jul 2013

  • Investment risks include: Market risk, security specific risk and sector concentration risk

Generate income beyond dividend yield

Options investing used to be a no-go zone for investors given they were perceived as too complex and opaque to understand. But it has since become popular among all investors, thanks to the rise of low-cost options. Both of the following products will take a closer look at one kind of options product - the "covered call" or the "buy-write" strategy.

But first - what is the covered call strategy?

A covered call gives someone else the right to purchase stock shares you already own at a specified price and at any time on or before a specified date (expiration date). Covered calls can potentially earn income on stocks you already own.

And as already mentioned, a covered call can be a great way of generating income in down or flat markets but will limit your upside in a bull market (simply because in a very bullish market, it's better to just hold the stock rather than write an option to hold it in a number of days or weeks where you might miss the rally).

Both of the following products utilise this strategy to generate extra income.

Betashares Australian Top 20 Equity Yield Maximiser Fund (managed fund) (ASX: YMAX)

Cumulative contribution of each stock to the trailing 12-month S&P/ASX200 Index yield (highlighting the top 10 contributors)

Screenshot 2023-12-21 at 9.53.54 am
Source: Bloomberg, Betashares, as at 24 November 2023. Chart shows the cumulative contribution of each stock to the overall dividend yield of the index, based on each constituent’s dividends and its proportional weight in the index as a whole. Past performance is not indicative of future performance of any index or fund. You cannot invest directly in an index.

"YMAX offers a way to diversify the income you generate out of your equity portfolio, so you are not solely reliant on dividends. It holds a diversified portfolio of the 20 largest Australian shares, then call options are written over the portfolio, such that some of the potential upside is given away in return for the fund receiving option premiums," the Betashares team say.

"If you have a need for investment income, and you believe the prospects for capital growth in the Aussie market are muted you may want to consider YMAX," they add.

  • Top five holdings: BHP, Commonwealth Bank, CSL, NAB, Westpac

  • Strategy: Covered calls

  • Management costs: 0.76% p.a.

  • Inception date: 22 Nov 2012

  • Investment risks include: Market risk and use of options risk

Global X S&P/ASX 200 Covered Call ETF (ASX: AYLD)

Buying an ETF which uses the covered call strategy also has a different benefit, as Global X's David Tuckwell explains:

"While options trading typically demands expertise, time, and upfront trading costs, advancements in product innovation now enable investors to access this strategy through a single tradable ETF on the ASX," Tuckwell says before going on to say:

"As volatility increases, the income from options also grows. As we move into 2024, with ongoing tensions in the Middle East, central banks combating inflation with rising interest rates, and share market volatility, investors seeking income may discover that covered call ETFs are valuable instruments for navigating these market conditions."

"AYLD has the potential to enhance income diversification for investors by drawing income from three primary sources: 1) dividends from the underlying stocks; 2) franking credits; 3) options premium," he adds.

Screenshot 2023-12-21 at 10.01.54 am
Source: Global X
  • Top five holdings: BHP, Commonwealth Bank, CSL, NAB, Westpac

  • Inception date: 30 January 2023

  • It was Australia’s first S&P/ASX 200 passive covered call ETF

  • Management fee: 0.60% per annum

The return of fixed income in 2024

Global X US Treasury Bond ETF (Currency Hedged) (ASX: USTB)

The return of non-near-zero interest rates has also signalled a long overdue return for fixed income. The consistent cutting in interest rates provided bonds with the last legs of a 40-year bull market. Now that this historic rate hiking cycle among Western central banks is nearly done, investors are looking for entry points into fixed income so that it can provide a long sought after defence for portfolios.

"US Treasuries will also be in vogue next year thanks to real yields sitting in their highest 90th percentile over the past 20 years at many points in the curve. And indeed, with the rising debt pile in the US, and inflation trending down, some investors are surely wondering how long yields can stay at these levels for – especially as the Fed signals rate cuts could be on the way as early as March 2024," Tuckwell says.

"USTB tracks the iBoxx [US]$ Treasuries Index (AUD Hedged) to provide exposure to US treasuries across the yield curve. The average maturity is currently sitting around eight years, with a AAA credit rating from Moody’s," he adds.

  • Inception date: 1 July 2022

  • It was the first fund of its kind to be launched in Australia.

  • Management fee: 0.19% per annum

  • Global X recently reduced the management fee from 0.20% to 0.19% to offer a means of further stability to investors’ portfolios

  • Thanks to investor demand and favourable economic conditions for USTB, AUM reached $500 million in less than a year after its launch

This article was first published on Livewire Markets.

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Written By

Hans Lee

Content Editor

Hans is a Content Editor at Livewire Markets and Market Index. He created Signal or Noise and helps write the LW-MI Morning Wrap on Tuesdays and Thursdays.

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