In the hunt for retirement income, exchange-traded funds are worth exploring

Mar 15, 2019
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ETFs are transparent - what you see is what you get when it comes to the underlying investments. Source: Getty

It’s no secret that Australians are living longer. The average life expectancy for an Australian born in 2016 is 84.6 for females and 80.4 for males. Australians are now among the longest living people in the world.

With that in mind it should come as no surprise that as Australian life expectancy extends, generating a sustainable income stream becomes increasingly important. But with interest rates at a historical low and ongoing signs of market volatility, many investors are having to work with their investment professionals to rethink how they derive future income.

Creating an income portfolio that meets the demands of the current investment reality is a challenging task. Returns from traditional investment sources have been modest, while corporate performances from blue chips in resources and financial services has put a spotlight on the sustainability of dividend yields in Australia.

In a “lower for longer” environment many investors are searching for alternatives to provide an income stream that meets their needs. It’s not hard to see why so many are turning to exchange traded funds (ETFs).

An ETF is commonly described as a basket of securities that investors can buy and sell on exchanges just like any other share. The aim is usually to track the performance of an index, such as a sector or market, in an efficient and a low-cost way.

ETFs are a transparent, easy to use and low-cost investment tool that investors of all ages are using to meet their income and savings needs. They can offer broad exposure and access to a comprehensive range of global and Australian equities and bonds in one trade.

The benefits of ETFs are clear to see:

  • They are inherently transparent. This means that investors have all the tools they need to make informed and smart investment decisions. In fact, portfolio compositions are often posted daily and fully disclosed, so investors can see at any time exactly what they have invested in.
  • Due to their index structure, ETFs are generally low cost. This means cost is less likely to be a barrier to entry, and investors can keep more of their returns.
  • They can provide instant and effective diversification. ETFs cast the net wide and spread investments across numerous securities, meaning that investors are given broad exposure to an industry or market.

When it comes to building wealth, ETFs offer reliable building blocks for portfolio income generation and are a popular investment tool for investors on the hunt for income.

ETFs allow investors to generate income in a similar way to holding a whole portfolio of investments, but with just one trade. Like individual shares, ETFs collect dividends from the securities they hold. When these securities pay dividends, investors in that fund stand to gain dividend payments from a broad array of companies and sectors.

ETFs also play an important role in generating income through diversification. By spreading an investment across a range of companies and industries and achieving broad exposure, investors can reduce the risk that comes with individual stock picking.

One example of an ETF that demonstrates the value of diversification and the opportunity to find income is the SPDR S&P Global Dividend Fund (WDIV), which tracks the S&P Global Dividend Aristocrats Index. Of course, I’m referring to one of our products but you can find ETFs to help meet your investment goals from a variety of fund manager.

The S&P Global Dividend Aristocrats Index is made up of high-yielding companies that have grown or maintained the dividend yield for at least 10 consecutive years. This is an exclusive club – of the 11,000 stocks in the S&P Broad Market Index (BMI) which is a global index – only the top 100 stocks based on dividend-yield weights are included in the S&P Global Dividend Aristocrats Index.

When it comes to seeking long-term income, investors may want to consider the sustainability of dividend yield rather than just the size of dividends. By filtering for companies that are consistently delivering dividend yield, long-term income is a key strength of WDIV.

Traditionally, accessing the top 100 stocks based on dividend-yield weights would be expensive and difficult for many investors, but ETFs have provided an easy and cost-efficient way to reach this opportunity.

As Australians live longer, exploring new ways to build wealth will become ever more critical to ensuring investors can achieve their long-term financial goals. For many investors, ETFs are offering low-cost and transparent building blocks for sustainable portfolio income generation.

What income-producing investments have you explored? What did find was the most effective for your purposes?

Important information: The information provided on this website is of a general nature and for information purposes only. It does not take into account your objectives, financial situation or needs. It is not financial product advice and must not be relied upon as such. Before making any financial decision you should determine whether the information is appropriate in terms of your particular circumstances and seek advice from an independent licensed financial services professional.

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