Three concerns currently dominating investors’ mindsets:
- How to get sufficient yield out of your portfolio without taking on too much risk?
- How to protect capital in a volatile environment with several event-driven risk events looming?
- How to easily diversify your portfolio into more attractive thematics?
As I explored last week in more detail, ETF’s can be used strategically to achieve specific objectives over pre-determined timeframes.
What I would like to explore in this video is how ETF’s can be used to manage the abovementioned three concerns in a simple, effective and predictable manner.
With regard to income enhancement, there are many ETF’s that aim to provide investors with above market yields. We believe Betashares’ HVST is currently the most directly effective ETF on the market. Harvester is an actively managed income fund that holds a portfolio of around 14 stocks chosen from the ASX 50. The fund is regularly rebalanced to ensure the highest gross yield from within the index until the next rebalance period. What this amounts to is a partially franked 12% annual yield paid monthly.
Where capital protection is concerned, many investors would typically liquidate equities positions or shift asset allocation and of course this is a viable solution. However, it can also be quite messy in practice with high transaction costs and tax implications amongst other things. An alternative could be a short ETF such as Betashares’ Bear or Strong Bear Fund which sell ASX 200 futures contracts which ensure performance is negatively correlated with the index. The major difference between the two bear funds is that BBOZ is leveraged so that it is 2.3 to 2.7 times as volatile as the underlying index where BEAR is not. Conversely, investors may wish to shift some of their portfolio into gold, due to its historically low correlation with other asset classes – ETF securities’ GOLD ETF is fit for that purpose.
Diversifying your portfolios with ETF’s can prove to be a simple way of gaining exposure to certain sectors, markets or thematics. There are many providers offering many broad and specific products. Investors wishing to gain exposure to US equities might use an S&P 500 ETF such as iShares’ IVV. Alternatively, SPDR runs several sector-specific funds such as Aus Resources or Financials and Betashares’ runs several thematic ETF’s such its newest listing, HACK which invests in global cybersecurity companies. The point here is that a strong view on a certain sector, market or thematic can be easily exercised using ETFs in a simple, transparent and cost effective manner.