The One Stop ETF for Income Investors

ETF SNAPSHOT – MVB

I spoke on the Market Monthly webinar yesterday about the "truth about income investing", which is that the best income stocks in Australia, if not the world, are the 'too big to fail' Australian banks, which only need to be sold in extreme market or sector events like the 2008 GFC, COVID, and the demonisation of the banks for political gain which led to the Hayne banking sector inquiry in 2017–2019. And even then, the only reason to sell was to take advantage of the opportunity to buy more lower down and exploit the recovery rally for accelerated gains in a short period of time.

If you really wanted income without stress, you could arguably just buy CBA (highest quality bank), although it is currently overpriced compared to history on a PE of 54.5x when the long-term PE range is more like 10–16x. So don't do that today.

As a broker, clients who ask "Which bank is the best" are usually met with the response that they all have their moments of outperformance and underperformance (CBA has outperformed them all in the long term), so the best solution is to simply "hold them all", and on that front, the MVB ETF is a great way to do that.

Here is the description.

And here is the reality. Look at the top ten stocks. It only has seven, and the BOQ and BEN holdings are a bit irrelevant. So it is effectively an ETF that gives you a 20% holding in the big four plus Macquarie. The average PE at the moment is 20x, and the average yield is 5.26%, including 91% franking.

It's your one-stop shop for a bank exposure. When the next major market washout comes along, this should be on your list of income "stocks" when the market is next in a sentiment hole. It's a touch 'elevated' at the moment, compared to history.

When it comes to ETFs, there was a "fad" a few years ago when interest rates were down at 1% to issue ETFs that promised high yields. Beware.

It is a fact of life that you cannot squeeze more blood (income) out of the stone (equities) than is available, and anyone promising to do that is simply selling you a marketing line to get you into their fund (ETF). But if it's paying you a higher-than-average yield, then the only way they could possibly do that is to return to you your own capital, in which case the share price of the ETF will terminally decay. There's nothing for nothing in equities. There is no income available that isn't there.

There is a saying in the finance world – "Anything that yields more than 10% doesn't." In other words, if the yield is high, you need to find out why, because your capital is either taking an extraordinary risk (which is the opposite of income investing), or your capital is being abused or returned to make the yield target.

Case in point. I don't know what the "total return" of HVST is; it may be acceptable, but you get the idea. The price has halved. If Betashares wants to explain that, I will happily publish it.

By the way, there was also a fad offering exposure to covered call income as if it were some sort of elite clever strategy. Ignore. There are some very wealthy people who have huge holdings in stocks like the banks which, if they sold them, would trigger unwanted capital gains and tax. So to enhance the return (income) they get from those (often huge) holdings, they write (sell) out-of-the-money call options over the holdings to achieve a tiny extra yield (1–2% maybe, depending on the risk they are prepared to take). It is a strategy for people with existing large holdings. If you fall for the marketing of covered call strategies from a standing start without the huge holdings to write call options against, you are going to burn yourself on time value and transaction cost for next to no return. It's the epitome of ETF marketing over customer reality.

In broking, I used to take calls from wealthy private clients once a month to roll their written calls from one expiry to another.

 

From AI – The ASX-Listed ETFs Targeting a Higher Yield

Australian equity high-dividend (dividend screens)

• VHY – Vanguard Australian Shares High Yield ETF
• SYI – SPDR MSCI Australia Select High Dividend Yield ETF
• IHD – iShares S&P/ASX Dividend Opportunities ESG Screened ETF
• ZYAU – Global X S&P/ASX 200 High Dividend ETF
• RDV – Russell Investments High Dividend Australian Shares ETF

"Dividend harvester" style (active, franked income focus)

• HVST – BetaShares Australian Dividend Harvester Active ETF (targets franked income above the broad market)

Global equity "income / high dividend" (not bonds)

• INCM – BetaShares Global Income Leaders ETF (global companies with long dividend track records; pays income)
• WDIV – SPDR S&P Global Dividend ETF (tracks S&P Global Dividend Aristocrats)

Australian equity

• YMAX – BetaShares Australian Top 20 Equity Yield Maximiser (covered calls)
• AYLD – Global X S&P/ASX 200 Covered Call ETF

US equity

• UMAX – BetaShares S&P 500 Yield Maximiser (covered calls)
• QMAX – BetaShares Nasdaq 100 Yield Maximiser (covered calls)
• UYLD – Global X S&P 500 Covered Call ETF
• QYLD – Global X Nasdaq 100 Covered Call ETF