YMAX: Performance Warning

We assign a 'performance' warning label to ETFs and managed funds which we believe will likely produce a return and risk profile that is different to a traditional ETF or fund operating in this sector. This will include most ETFs which uses an active or rules-based approach to investing, such as:

• Yield, value, quality, momentum and growth "factor ETFs"
• Equal weight strategies
• Hedge fund style ETFs
• Multi-asset funds, and
• Ethical ETFs

For example, let's say you're comparing two ETFs that you found here on the Best ETFs Australia website. Both of the ETFs operate in the Australian shares sector. So, regardless of which ETF you invest in, you get exposure to the local share market.

However, let's say ETF #1 uses a rules-based "yield strategy" and only ever buys shares in companies which have high dividend yields. ETF #2 uses a traditional "market capitalisation" or vanilla indexing strategy -- that is, for example, it only buys shares in the largest 200 or 300 companies on the market. Broadly, here's what our team at Best ETFs Australia expect you will get from your investment:

• Yield strategy (ETF #1) -- with this ETF you'll get exposure to a portfolio of dividend-paying Australian stocks/shares. The dividend or 'historical yield' on this ETF will look higher than ETF #2 and it'll probably have fewer stocks inside the portfolio because not every share pays a dividend. The companies inside the ETF are giving up some of their profits that could be reinvested in the business.
• Traditional market cap strategy (ETF #2) -- with this ETF you will get all of the largest shares in the, for example, top 200. Some will pay dividends back to shareholders and some won't pay dividends. In our opinion, the most likely reason a large company will not pay a dividend is because they want to keep that cash inside the company for growth and new projects. Typically, this leads to more profit and the companies can grow faster.
• The difference. Ultimately, the difference between the two ETFs is how you get your returns and impact that has on your wealth in the long run. You might like an ETF to pay a regular dividend. But if you're a long-term investor (5-10+ years or more) you might find that the ETF which pays higher dividends (ETF #1) is sacrificing growth and might actually be going backward! Please take another look at the image above. It shows a simplified example of the potential trade-off. Of course, some ETFs can pay dividends and grow over time. We're taking a generalised approach.

Our take: don't be fooled by every ETF and fund that claims to provide a 'differentiated' approach to investing. There's no secret formula. Every investment has risks.

Tired of the same ol' dividend stocks?

Australian shares sector

The Best ETFs Australian shares sector includes ETFs, managed funds and index funds which cover the ASX and national stock exchange (NSX). It also includes other sharemarket-focused ETFs and funds which may hold investments overseas (e.g. via the New Zealand or US exchanges).

Performance Characteristics

Over the ultra-long-term, the Australian share market has proven to be among the best-performing in the world. We truly are 'the lucky country'.

One of the unique features of the Australian sharemarket is a willingness by companies to pay substantial dividends back to shareholders. We believe this may be a result of Franking Credits.

What exactly does Australian shares invest in?

The YMAX ETF invests in the top 20 Australian companies, by market capitalisation, and aims to generate tax-effective income and some capital growth.

Sector risks

The Australian sharemarket is heavily skewed towards financials (i.e. banks and insurers), resources and property. These companies tend to be 'cyclical', meaning they move in-line with the direction of the broader economy and financial markets.

Some risks to investing in this sector include:

• Market risk: This is the risk that the performance of the ETF/fund rises or falls unexpectedly day-to-day, month-to-month or even year-to-year. We believe these price movements are unpredictable. Therefore, we believe investing for multiple years is the most prudent way to invest.
• Home country bias: That happens when you invest a larger amount of your money in local/Australian investments and exclude overseas markets. This may be because it is 'too difficult' or 'too complex' to invest in overseas markets.
• Concentration: The Australian share market is made up of many companies. However, traditional market indices have a very high proportion of their performance tied to just a few investments, such as blue-chip shares in the financial and resources sectors.
• Regulatory risk: Australia is a market with a robust financial system. Changes to the rules or laws regarding public investments could alter the performance of ETFs and funds in the sector.

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What you need to know about BetaShares

BetaShares is one of Australia's largest ETF issuers, by number of ETFs issued on the ASX. At the end of 2018, Betashares had $6.1 billion of money invested in its ETFs.

BetaShares was founded in Sydney by a group of finance professionals who have a venture capital (VC) business called Apex Capital Partners. BetaShares was an 'in house' investment for Apex but grew quickly as ETFs took off.

Betashares is part-owned by Mirae Asset Global Investment Group, a specialist ETF business which manages nearly $130 billion.

$6b+ invested in BetaShares ETFs

BetaShares launched its first ETF in 2010 but has grown its ETF count rapidly to have around 50 ETFs in the market today.

BetaShares has issued index fund ETFs, rules-based ETFs and actively managed funds in an ETF wrapper. To launch its active funds, BetaShares teamed up with Legg Mason and AMP.

Potential allocation for YMAX

This ETF might be used as part of a 'tactical' or 'satellite' allocation in a diversified long-term portfolio because of its unique strategy, costs, risk-reward profile and the expectation of long-term returns.

What is The Core-Satellite Approach?

A core-satellite approach puts investments into two 'buckets' depending on the expected risk and returns.

Bucket 1: Core Investments

The 'core' is the larger part of an investment portfolio and could be reserved for more conservative investments. For example, this might include diversified, low-cost and easy to understand funds, bonds, shares or ETFs.

If you're new to investing, the core is a good place to start.

Core ETFs might include:

• Australian shares (index strategies)
• Australian bonds and global bonds
• Cash

Bucket 2: Satellite/Tactical Investments

The 'satellite' or tactical bucket is the smaller part of a portfolio (e.g. 0% to 30% of your entire portfolio). In this section, investors might decide to take more risk, invest in unique or unproven strategies, buy fast-growing individual shares, etc.

Tactical strategies could be higher risk, higher cost and more complicated strategies that are used in the hope of outperforming the averages (e.g. ASX 200, S&P 500, etc.).

Tactical ETFs might include:

• Australian shares (rules-based strategies)
• Global shares (rules-based strategies)
• Commodity ETFs
• Currency ETFs
• Cash ETFs
• Hedge funds

Typically, what is YMAX used for?

YMAX could be used by investors who are primarily focused on income from Australia’s top 20 blue-chip companies. The fund generates higher levels of income by selling call options on up to 100% of the portfolio holdings. Please note that YMAX does not track an index.

How do I invest in the Australia Top 20 Equity Yield Max Fund (Managed Fund) ETF ETF?

The easiest way to buy an ETF is through your online share brokerage account. Just search for the ticker code and buy it. The following podcast explains how to buy shares and ETFs for the first time.

Meaning, you can follow the exact same process for ETFs as you do for shares -- both can be purchased in one account.

Australian Investing 101

Don't have a brokerage account for ETFs?

Read our tutorial on understanding how share brokerage accounts work.

Is YMAX a good ETF?

We believe that knowing whether or not to invest in an ETF requires a lot of research, even for an ETF like this one. ETFs are long-term investments, so it's important to do the right amount of research into the ETF before you invest, and consider how it fits with your risk profile, strategy and the other investments in your portfolio.

Where you can go to find more research on this ETF:

Reports like this one on the Best ETFs Australia website were built to help you understand ETFs and to provide free access to news and research across all Australian ETFs, index funds and selected managed funds.

This report is the free version of our ETF reserach and it contains general information and should not be considered as a recommendation or personal financial advice. If you want to receive personal financial advice and have someone tailor the ETF research to you, you should speak to a financial adviser.

If you don't want to pay a financial adviser, here's what you can do:

• Before doing anything, you should always read the ETF's Product Disclosure Statement (PDS), which should be available on the ETF provider/issuer's website. The PDS explains some of the risks, the fees and other important information.

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Disclaimer: Any information contained in this report is limited to general financial advice/information only. The information should not be relied upon because it has not taken into account your specific needs, goals or objectives. Please, consult with a licenced and trusted financial adviser before acting on the information. Past performance is no guarantee of future performance. Nothing in this article should be considered a guarantee. Investing is risky and can result in capital loss. By reading this website, you acknowledge this warning, having read our Financial Services Guide (FSG) and agree to our terms & conditions available here. This article is authorised by Owen Raszkiewicz of The Rask Group Pty Ltd.