As well as providing investors with exposure to sectors and indices, exchange-traded funds (ETFs) can be used to support certain investment strategies.
For example, if you're not a fan of stock picking but want to build an income portfolio, there are a number of ETFs that you could consider such as the BetaShares S&P 500 Yield Maximiser (ASX: UMAX) and the Vanguard Australian Shares High Yield ETF (ASX: VHY)
The former uses a clever equity income investment strategy over a portfolio of shares comprising the S&P 500 Index on Wall Street to generate a greater-than-average dividend yield from the constituents of the index.
At last count, the BetaShares S&P 500 Yield Maximiser was providing investors with a dividend yield of 9.2%.
Whereas the latter, as you might have guessed from its name, gives investors exposure to a collection of the highest-yielding ASX shares. Though, it is worth noting that it does this with diversification in mind so that you don't end up with a portfolio filled with coal and iron ore miners.
According to Vanguard, it currently trades with a forecast dividend yield of 5.4%.
How much would I need to invest for $4,000 of income?
If you were aiming for $4,000 of monthly passive income from these ETFs, you would need to invest a sizeable sum across them both.
That's because to earn this level of income per month, you'll need to generate $48,000 in dividends over 12 months.
From the Vanguard Australian Shares High Yield ETF, you would need to put a sizeable $444,000 into the fund to earn $24,000 annually ($444,000 * 5.4% = $24,000).
Fortunately, you wouldn't need to make as great an investment in the BetaShares S&P 500 Yield Maximiser ETF right now thanks to its huge yield. An investment of approximately $260,000 would yield $24,000 in dividends annually for investors ($260,000 * 9.2% = $24,000).
That means a total investment of just over $700,000 could potentially yield you $48,000 annually and $4,000 monthly in passive income.
What if you don't have $700,000?
Unfortunately, very few people are lucky enough to have this amount of money free to invest in the share market.
But if you have time on your side, you have the potential to get there by making consistent investments into the share market over the long term.
While past performance is no guarantee of future returns, according to Fidelity, the Australian share market has returned 9.6% per annum over the last 30 years. I would be disappointed if it didn't achieve similar returns over the next three decades.
This means that if you invested $4,200 per annum over 30 years and earned the market return, your investments would have grown to $700,000. After which, you could switch your focus to income, and sit back and watch the dividends flow in!
