The emergence of exchange traded funds (ETFs) as an investment option in recent years has been a real blessing for investors.
ETFs allow investors to buy large groups of shares from all corners of the world with a single click of the button. Previously, you would have to jump through hoops to invest internationally, and some markets were near impossible to gain access to.
Another positive is that ASX ETFs provide investors with easy access to groups of companies that fit a particular investment theme. This could be growth, value, mining or income, for example.
In this article we're going to focus on a couple of funds that offer investors the opportunity to generate passive income from the share market.
One uses a clever covered call strategy to generate income, whereas the other uses a fundamental indexing strategy. Here's what you need to know about these funds:
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Betashares Australian Top 20 Equity Yield Maximiser Fund (ASX: YMAX)
The first ASX ETF that could be a top option for passive income investors is the Betashares Australian Top 20 Equity Yield Maximiser Fund.
It aims to generate attractive quarterly income and reduce the volatility of portfolio returns through the use of a covered call strategy over a portfolio of the 20 largest blue-chip shares listed on the Australian share market. A covered call is an options trading strategy that allows an investor to profit from expected price rises.
Betashares, which recently recommended this ETF, notes that the Betashares Australian Top 20 Equity Yield Maximiser Fund's covered call strategy "performs well in a neutral or gradually rising market."
At present, the ASX ETF was trading with a trailing 12-month dividend yield of 7.6%.
Betashares FTSE RAFI Australia 200 ETF (ASX: QOZ)
A second ASX ETF for passive income investors to consider is the FTSE RAFI Australia 200 ETF.
This fund, which is also being recommended by BetaShares, uses a fundamental indexing strategy which is designed to screen for stocks based on their merits rather than market capitalisation.
BetaShares notes that instead of size, the ETF screens ASX companies using sales, cash flow, dividends, and book value. It then ranks and invests in these companies accordingly.
This means that investors end up holding stocks that have healthier balance sheets, which have a greater capacity to pay dividends.
The Betashares FTSE RAFI Australia 200 ETF currently trades with a trailing dividend yield of 4.7%.
