The yield chasers
In today's low interest rate environment, investors who seek high, predictable income find it difficult to achieve their goals. The search for more income involves taking on more risk. Exchange traded funds (ETFs) offer yield-seeking investors access to a variety of asset classes that generate income. With ETFs, you do not have to lock your money away for a year with a bank in a term deposit, rather you buy and sell on ASX when you need to. Some ETFs pay income well above the returns paid by term deposits, however it's important investors understand the risks of the different ETF options available.
In the low interest rate environment that we have experienced since the GFC, which occurred over ten years ago, term deposits and cash management accounts are offering investors next to nothing in terms of yield. With more investors seeking income, particularly retirees, the search for higher yield involves taking on more risk.
It has been well documented that since the GFC Australian investors have sought yield from assets that expose them to more risk than term deposits, such as shares and property. The Australian banking sector has been particularly popular for yield-chasing investors and while banks have posted strong returns, with a healthy yield, their prices have been much more volatile than the principal of a term deposit, which retains its value. Also, additional risks such as regulatory risks, like the unanticipated bank levy, and concentration risk make for a wild ride in growth assets, especially if you are only invested in a handful.
To help smooth some of these fluctuations savvy investors are diversifying by employing professional fund managers that manage funds across a range of asset classes and sectors. One of the fastest growing types of managed funds are ETFs as they are tradeable on ASX and require less paperwork than their unlisted equivalents.
Many of the ETFs listed on ASX are designed specifically to provide income. There are defensive cash and fixed interest ETFs as well as property and dividend-strategy ETFs. However not all income strategies are easy to understand and it is useful for investors to be aware of the risks of some of the products listed on the ASX.
To help investors navigate VanEck's ETFs that generate income we have launched an online education resource – click here.
Recently the Reserve Bank of Australia (RBA) informed investors that they should be aware of some risks associated with certain ETFs, particularly the more complicated types of exchange traded funds. In particular RBA noted "counterparty and collateral risks that are typically associated with synthetic ETFs; as well as the complexity of alternative ETF structures."
According to the RBA, ETFs that use derivatives "rely on a counterparty paying the return of the ETF... so there is some risk that the counterparty could default or not be able to pay the return." Additionally, the RBA warns against "more complex structures, such as leveraged and inverse ETFs, as well as ETFs that use more obscure benchmarks. Some investors may not fully appreciate the risks of investing in these instruments."
It is not just Australian regulators making investors aware of the risks associated with some types of exchange traded products. In 2013, the UK's regulator, FINRA notified securities companies that inverse and leveraged ETFs that are reset daily are typically unsuitable for retail investors who plan to hold them for longer than one trading session, particularly in volatile markets.
VanEck does not resort to this complexity. Our ETFs are rules based, transparent and are easy to understand. Investors should take the risks associated with more complex products into account when choosing an investment.
Flexible income solution in one trade
One of the many benefits ETFs offer is that they are liquid. Investors can buy and sell units in an ETF on ASX throughout the trading day. That is one key advantage they have over investing in a term deposit where your money can be locked away for the term. ETFs can also diversify your portfolio significantly as a single ETF typically holds a lot more securities, obtained more cost effectively, than an individual investor doing it themselves.
Using ETFs, you can reap income from different asset classes, depending on your risk profile.
A number of VanEck's ETFs provide you with an ideal way approach to enhance your income and our range is explained in more detail here.
This information is issued by VanEck Investments Limited ABN 22 146 596 116 AFSL 416755 ('VanEck'). This is not a solicitation to buy or an offer to sell shares of any investment in any jurisdiction. It is general information only and not financial advice. It does not take into account any person's individual objectives, financial situation or needs. Before making an investment decision in relation to any VanEck funds, you should read the relevant PDS and with the assistance of a financial adviser consider if it is appropriate for your circumstances. PDSs are available at www.vaneck.com.au or by calling 1300 68 38 37.