Unpacking The BetaShares S&P 500 Yield Maximiser
The BetaShares S&P 500 Yield Maximiser is an ETF that holds the companies in the S&P 500 Index but aims to provide a greater dividend return than what would usually be received.
The fund is actively managed and invests in all of the typical large US companies such as Facebook Inc. (NASDAQ: FB), Microsoft Corporation (NASDAQ: MSFT), Apple Inc. (NASDAQ: AAPL) and Amazon.com, Inc (NASDAQ: AMZN).
Over the last five years, the UMAX ETF has returned 12.14% per year after fees. The 12-month trailing dividend yield at 31st August 2019 was 5.4%, which is well above the regular dividend return from the S&P 500 Index. So, how has UMAX achieved a greater yield?
The UMAX ETF pays out the dividends received from the companies held in the portfolio by way of distributions, but also sells call options on the underlying holdings. Basically, a call option is the right to buy an underlying asset at a given price.
The UMAX ETF sells these call options for a premium, which can be paid out to shareholders along with the distributions to increase the dividend yield.
The video below explains options and other derivative securities in more detail:
The effect of this strategy is the potential for both an increase in dividend yield and a decrease in volatility. The call option premiums also provide a partial hedge against a falling market. This strategy is expected to outperform the S&P 500 in falling, flat, or gradually rising markets.
Fees & Risks
The UMAX ETF charges a management fee of 0.79% per year, which is relatively typical for a managed fund.
UMAX is exposed to all the usual risks associated with a S&P 500 ETF, but the call options add some extra risks to this ETF. For example, in a rapidly rising market, the call options that the fund sells will be exercised, which forces the ETF to sell for a price lower than the current market price. The result is a reduced potential for large capital gains, which is somewhat offset by the greater stability of the ETF.
This is an interesting ETF and one of the more creative ways of creating stable dividend income. The UMAX ETF does sacrifice some capital gains in a rapidly rising market, so it may not be suitable for investors who are looking for growth. However, if you’re just looking for income, this may be worth considering. Options can be complex though, so be mindful to properly understand what you’re investing in before you buy.
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Disclosure: At the time of writing, Max does not own have a financial interest in any of the companies mentioned.