With interest rates expected to decline further over the coming months, high-yield ASX ETFs may be more appealing.
The Reserve Bank of Australia (RBA) has already cut rates twice this year, reducing the official cash rate from 4.35% to 3.85%.
While the RBA elected to leave rates on hold at its last meeting, economists widely projected several further rate cuts to be delivered over the coming months.
Earlier this year, ETF provider Betashares named three high-yield ASX exchange-traded funds (ETFs) that offer attractive income.
What are they?
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Nasdaq 100 Yield Maximiser Complex ETF (ASX: QMAX)
The first named was the Nasdaq 100 Yield Maximiser Complex ETF. This ETF provides investors with reliable income as well as exposure to the top 100 companies listed on the Nasdaq. This allows investors to receive passive income and gain geographical diversification in the US stock market.
Typically, US companies do not pay substantial dividends. However, this ETF aims to enhance income above that generated by the underlying companies through a 'covered call strategy'. To compensate for this added layer of complexity, the management expense is 0.68%. This is above the management fee charged for the majority of passively managed ASX ETFs.
As of 30 June, the 12-month trailing distribution yield was 6.6%. That's much higher than investors can expect to receive by investing in a term deposit.
Australian Top 20 Equities Yield Maximiser Complex ETF (ASX: YMAX)
The Australian Top 20 Equities Yield Maximiser Complex ETF is another high-yield ASX ETF to consider. This ETF aims to generate income through investing in a portfolio of 20 large capitalisation ASX-listed companies. It contains well-known names such as the big four banks, CSL Ltd (ASX: CSL) and Wesfarmers (ASX: WES).
As of 30 June, the 12-month trailing distribution yield was 7.5%. This is likely to appeal to those seeking significant passive income.
Like the QMAX ETF, the YMAX ETF uses a covered call strategy to achieve its investment objectives. However, in this case, it aims to reduce volatility. Again, to compensate for this added layer of complexity, the management expense is relatively high at 0.64%.
Betashares Australian Bank Senior Float Rt Bd ETF (ASX: QPON)
A final option is the Betashares Australian Bank Senior Float Rt Bd ETF. Unlike the two previously mentioned ETFs, which hold equities, the QPON ETF focuses on fixed income. It offers exposure to senior floating-rate bonds issued by Australian banks.
Betashares suggests this ETF may appeal to those looking for a more defensive portfolio.
According to Betashares, Australian bank senior floating rate bonds historically have had a high level of capital stability and limited capital variability in equity market declines.
As of 30 June, the 12-month trailing distribution yield was 5.1%. This is still above the current interest rate of most term deposits.
Its management expense is also materially lower than the previously mentioned ASX ETFs, at 0.22%.
Foolish Takeaway
In a falling interest rate environment, the appeal of high-yield investments increases.
Two of the ASX ETFs discussed focus on equities. It's crucial that investors understand the risk involved when switching from term deposits to equities. Term deposits are essentially risk-free, whereas equity investments carry a risk premium. With the S&P/ASX 200 Index (ASX: XJO) trading not far off its all-time high, this is certainly something that investors should consider.
Those wanting a more defensive investment that's also high yield might prefer the QPON ETF. While safer than equity-focused ETFs, the QPON ETF is still slightly more risky than a term deposit, which is essentially risk-free.
Ultimately, the decision to swap term deposits for high-yield ASX ETFs should be based on the individual investor's risk tolerance and investment goals.
