Specialist investment research house Lonsec said the search for yield has fast made its way into the ETF space, but warns investors to be aware of what they are really gaining exposure to.
Michael Elsworth, General Manager – Specialised Research, Lonsec, said that the current subdued global growth prospects meant the search for yield is strong and ETF issuers have sought to benefit from this trend. He cautions that investors need to have a strong understanding of what they are really investing in.
“High divided ETFs are designed to track indices that measure a filtered universe of stocks that hopefully provide above market average dividends,” Mr Elsworth said.
“It is essential for investors to understand that ETFs are not all the same and even high yield ETFs have different asset classes or sectors underpinning the investment. It is important to appreciate the different rules governing the construction of each index.”
Lonsec compared the governing rules of high yield ETFs from iShares, Russell, SPDR and Vanguard and found the portfolio of stocks held by each high dividend ETF at a specific point in time varied significantly, even though they are all considered to be in the same category.
Mr Elsworth observed:
- The Russell, SPDR and Vanguard funds all had in excess of 40% exposure to the Financials ex-Property Trusts sector.
- None of the ETFs had meaningful exposure to the mining sector given its traditional volatility and/or limited dividend history.
- The top 10 holdings of iShares were noticeably different to the other three ETFs, with by far the least exposure to financials.
- The iShares sector cap of 20% is lower than the other high dividend ETFs which promotes greater diversification and a skew to smaller cap stocks.
“The comparison illustrates there are subtle but important differences between ETFs, and the nature of each fund’s underlying investment – such as equities, debt or hybrid securities – means returns have the potential to be vastly different,” Mr Elsworth said.
Investors requiring greater certainty from income distributions could consider sacrificing some yield and investing in potentially less volatile fixed income funds.”
The findings come from the inaugural Lonsec ETF Journal, which was released today. The journal provides updates on recent changes to the Australian ETF market, Lonsec’s conclusions from recent ETFs sub-sector reviews (equity based, fixed income based, and alternative strategies based), as well as topical issues that advisers and investors need to be wary of when considering ETF investment options.
Lonsec’s research process involves two different approaches: one for actively managed funds and one for passively managed funds such as ETFs. As the ETF market in Australia continues to experience significant growth, the Lonsec ETF Journal will provide advisers and investors with consistent and reliable information in relation to a range of important and contemporary issues.