Three Ways to Generate SMSF Income with ETFs

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Three Ways to Generate SMSF Income with ETFs

Authored by Global X ETFs

Income generating assets are key building blocks in an SMSF. Whether you have decades, years or months left before you retire, it is important to consider how your portfolio is allocated to produce enough income and reach your investment goals. Thankfully, by using ETFs you can enhance your income potential in line with your investment time horizon and risk appetite. 

1. Covered Calls For Potentially Greater Yield

Covered call strategies may not be the most commonly used income tool in an SMSF portfolio, however when implemented correctly covered calls – also referred to as ‘buy-writes’ – have the potential to deliver double digit yields.

Covered calls are generally made on individual stocks and traded on the derivatives market. This requires investors to have specialised knowledge and the ability to take on an elevated level of risk. Covered call ETFs do not completely remove these risks, however they can help mitigate them by making a ‘call’ on an entire underlying index such as the S&P/ASX 200.

If allocating to a covered call ETF which tracks an Australian index, investors have the potential to gain yields through the premium gained in the derivative trade as well as dividends from the underlying holdings. This means investors can also receive franking credits for these dividends (which usually do not apply to derivative trades). Ultimately, this double pronged approach works to diversify and enhance income potential.

2. Boosting Income Potential with US Bonds

Fixed income assets may seemingly lack the pizzazz of equity markets, but as its name suggests fixed income can often deliver reliable yield. For an SMSF, bonds are a key fixed income asset which can offer yields and diversify your risk and income streams.

US investment grade bonds strike a balance between risk and reward – offering proportionately higher yields than US treasuries, but lower yield potential than riskier high yield bonds. Therefore, to build up your portfolio’s resilience and yield potential you could consider having multiple US bond ETFs in your investment mix.
For a more conservative portfolio – or to diversify fixed income allocation – US government bonds are considered to be the least risky type of US bonds because they are unlikely to default (be unable to pay back the bonds).

Purchasing individual investment grade or government bonds poses the same risk as buying an individual share – essentially all your eggs are in one basket. By using an ETF which holds multiple bonds with varying maturities, it helps to spread any risks and potential yields.

3. Doubling Down on Dividends

If shares are more your speed, there are ETFs designed to deliver higher yields via dividends. These products aim to achieve this by using strict filters on an index – like the ASX 200 or S&P 500 – to create a basket of dividend producing, comparatively lower volatility stocks. As mentioned above, high yield ETFs which track Australian shares come with the added benefit of franked dividends.

An advantage of using ETFs to maximise dividend potential is reducing the guess work in having to select the correct shares which will deliver adequate dividends in advance of reporting season. This in-built diversification also means the stocks in a high yield ETF are often notably different to those in a broader index. The below graph showcases how an ASX 200 high yield ETF is allocated in comparison to the index itself.

However, investors must be aware that there is no free lunch with dividends. And companies dividends are usually priced into their shares in advance of reporting.

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