The search for yield after the reduction in the cash rate.

The recent decision by the RBA to lower the cash rate .25 basis points has some investors re-evaluating their current income strategies. In the search for income, one of the most popular strategies is equity investing because of the regular payments of dividends, the possible tax benefit offered by franking credits, and low interest rates offered by traditional income sources such as cash deposits.

But the market volatility this year has some investors asking if it is still a worthwhile option for accessing income. The case for equity income investing in a low-rate environment can be made when you look at the potential for equities to provide attractive income returns compared to cash or bonds (average one-year term deposit have fallen from 6.1% Feb 2011 to 2.4% Feb 2016[1]) and offer a potential stable income stream for investors.

However, investors need to take into take into consideration the Australian market’s concentration when building their income portfolio and consider global equities to improve diversification. Previously, only available to institutional investors, global equity income strategies are now easily accessible using cost-effective ETF products as building blocks of an income portfolio.

Although international high yield investments do not carry franking credits, they offer access to attractive equity valuations in potentially unvalued markets and benefit from structural trends across the global economy, including growth in emerging markets.

Using an ETF like the SPDR S&P Global Dividend Fund (Ticker: WDIV), which tracks the S&P Global Dividends Aristocrats Index representing high yielding companies with a history of stable or increasing dividends, investors can build a diversified income or yield seeking portfolio. Additionally, through WDIV investors are able to access high-yielding sectors underrepresented in the local market including utilities, energy and healthcare.

Regardless of whether you look local or global for income, investors must balance the benefits of the strategy with potential risks, including the risk that companies may cease to issue dividends or reduce their payouts in difficult markets, as well as currency and political risks related to global investing.

 by Shaun Parkin, Head of SPDR ETFs, State Street Global Advisors Australia

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[1] RBA, March 2016

Disclaimer: Investors should read and consider the relevant Product Disclosure Statement (PDS) for an ETF carefully before making an investment decision. A copy of SPDR ETF PDSs are available at www.spdrs.com.au. The material is general information only, should not be considered a solicitation to buy or sell a security and does not take into account your individual objectives, financial situation or needs.

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The fund will track the MSCI® World Quality Mix Index, providing investors with access to an equally weighted combination of three factor indexes — MSCI Value Weighted Index, MSCI Minimum Volatility Index, and MSCI Quality Index.

Smart beta is a form of investment management that represents an evolution in indexing. Its passive attributes are derived from an easily replicated, transparent, rules-based, and cost-effective approach within a wide investment universe. It shares some similarities with active management, due to the active choice investors need to make about which factor exposures to target. These strategies can potentially outperform a standard market cap benchmark by using non-market cap security weights.

“We are delighted to launch our new SPDR ETF for clients in Australia. An allocation to a Quality Mix ETF can be made as either a supplementary or complementary decision to a standard market-cap weighted mandate, depending on the investor’s factor conviction, constraints and style,” said James MacNevin, senior vice president and head of the Intermediary Business Group for State Street Global Advisors, Asia Pacific.

“We’re now making access to this strategy easier for investors through the form of an ETF, gaining exposure and diversification in one simple trade.”

Theodore Niggli, managing director and head of Index Product for MSCI, Asia Pacific said, “We are very pleased that SSGA has chosen the MSCI® World Quality Mix Index for this multi-factor index-based ETF in Australia. While the MSCI single factor indexes have earned a risk premium over the long term, by combining three more defensive factors, the MSCI® World Quality Mix Index is designed to dampen the cyclicality of returns.”

SSGA launched the first ETF in Australia – the SPDR® S&P®/ASX 200 Fund (STW) and, more recently, launched the SPDR® S&P 500® ETF Trust (the world’s first ETF) on the ASX late last year. This fund further extends the diversified and thoughtfully selected range of ETFs available on offer.

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The suite will comprise five risk-based models, ranging from high growth to conservative, and a flexible asset allocation model that incorporates a cash-plus approach with a focus on capital preservation when volatility occurs.

Mark Wills, head of SSgA Investment Solutions Group for Asia Pacific ex Japan, said: “Tactical asset allocation is increasingly gaining traction in Australia, which in turn is fuelling retail investor appetite for model portfolios that employ tactical asset allocation.

“SSgA has more than 20 years of experience designing asset allocation strategies for institutional investors. We build customised investment portfolios based on specific objectives for many of the world’s biggest institutions. With this new ETF model portfolio approach we are able to give retail investors access to this asset allocation expertise, implemented in a cost-effective, transparent way using ETFs.”

OneVue head of partner solutions Brett Marsh said having formed a strategic partnership with an ETF issuer as experienced as SSgA was a particularly pleasing feat for OneVue.

“SSgA created the first ETF globally, the first ETF domestically and currently holds the biggest share of the ETF market in Australia,” Marsh said.

“This partnership enables OneVue’s client base to leverage SSgA’s global and domestic expertise and capabilities in asset allocation, and gives clients access to model portfolios comprised of SPDR^® ETFs in addition to ETFs offered by other leading issuers.”

The suite of Australian-listed ETF model portfolios are tailored specifically for OneVue by SSgA and offer exposure to cash, domestic fixed income, domestic equities, international equities and alternatives. SSgA will advise on the asset allocation for the models, regularly reviewing the strategic allocation to ensure alignment to the stated objectives, while dynamically shifting allocations in response to significant market events. The exposure to each asset class is implemented via exchange traded products, including SSgA’s range of SPDR ETFs.

Mr Marsh continued: “In the near future these models will also become available on OneVue’s wealth management portal for organisations that cater to the self-directed market and will be an easy way for investors to diversify their portfolio in a flexible, tax effective and low cost manner,” Marsh said.

“We recognise that the adoption of ETFs continues to increase both in the advice and self-directed sectors, with the exchange traded product market reaching a record $8.8 billion in assets, according to the latest ASX Funds Monthly Update.

“ETFs provide an entry point to sectors that are more difficult to access in the Australian marketplace, for instance international markets, and they offer greater transparency as it’s possible to know precisely which securities the ETF holds daily.”

Marsh added that the addition of this suite on OneVue’s menu means advisers can tap into the skill set of qualified investment managers, while at the same time removing the challenge for direct investors in terms of what companies to pick, how they go about doing it and ways they can get exposure to different asset classes.

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Australia’s flagship ETF, the SPDR® S&P®/ASX 200 Fund (STW), enjoyed high liquidity and tight spreads throughout the recent market turmoil and closely tracked the index net asset value, despite the extreme volatility.

Frank Henze, Asia Pacific Head of ETFs at SSgA said “One of the key benefits of the SPDR S&P/ASX 200 Fund is its liquidity, allowing it to be traded at such a tight bid/ask spread. Last week we saw trading in the fund increase by up to 1000 percent. 4.5 million STW units were traded throughout the week ensuring investors were able to trade when they most wanted to do so.

“As a result of this high liquidity the fund was able to maintain a very tight spread. On Tuesday August 9, one of the most volatile days, the average spread on the fund was just 6bps compared to spreads of between 20bps and 27bps for other similar ETFs.

“The key benefits of ETFs are transparency, simplicity and value for money and the fund exhibited precisely these characteristics during the recent turmoil.”

Mr Henze said despite the concerns in the markets last week the high volumes did not represent investors selling out.

“One might assume that investors were simply getting out of ETFs last week given the fears that were prevalent at the time. However our data shows investors were using ETFs to gain exposure to the equity market in equal measure.

“There were no net redemptions during the week and in fact on one of the most volatile days we saw a significant temporary creation, indicating many investors saw the fund as an efficient way to gain market exposure.”

The SPDR S&P/ASX 200 Fund also gave investors accurate exposure to the Australian benchmark.

“Despite the highest equity market volatility since the GFC the fund accurately mirrored the market ups and downs, with performance of the fund deviating from the index by no more than 0.01 percent,” added Mr Henze.

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