With the average dividend yield from the S&P/ASX 200 Index (ASX: XJO) dropping below 3.5% this year, this exchange-traded fund (ETF) certainly catches the eye with its 9% trailing gross distribution yield.
According to Betashares, the Australian Top 20 Equities Yield Maximiser Complex ETF (ASX: YMAX) delivered a net yield of 7.6% and a gross yield of 9% over the 12 months to 30 September.
The gross yield factors in 45% franking.
So, how does this ETF achieve such a strong yield?
Let's take a look at what makes the YMAX ETF different.
Image source: Getty Images
Australian Top 20 Equities Yield Maximiser Complex ETF (ASX: YMAX)
YMAX aims to provide quarterly dividend income plus some capital growth, as well as less volatile investment returns.
YMAX ETF invests only in the top 20 companies listed on the ASX 200.
They include the big bank shares, such as Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC), and National Australia Bank Ltd (ASX: NAB), and the mega miners, BHP Group Ltd (ASX: BHP), Fortescue Ltd (ASX: FMG), and Rio Tinto Ltd (ASX: RIO).
There's also Wesfarmers Ltd (ASX: WES), Telstra Group Ltd (ASX: TLS), Coles Group Ltd (ASX: COL), and a few others.
However, collecting dividends and franking credits from these 20 stocks is not enough to generate as high a yield as 9% gross.
YMAX does something else to fatten up returns: it writes covered call options on up to 100% of its shares.
What is a covered call option?
It's an options strategy whereby YMAX sells call options on the shares it owns to generate extra income from the option premiums.
Each option has a strike price.
If a stock's value rises above that price, the option owner has the right to buy the shares from YMAX at the strike price.
They sell them on the open market to pocket the difference between the strike price and current market value.
If the share does not rise above the strike price, the option holder is unlikely to exercise the option.
The call options are referred to as 'covered' because YMAX already owns the underlying ASX 200 shares. This means it can easily meet its obligations if the call options are exercised.
YMAX writes call options with terms of one to three months. The strike prices are usually approximately 3% to 7% above market.
The options provide additional income via premiums on top of the dividends paid by the stocks in the YMAX portfolio.
The premium amount depends on many factors, including anticipated price volatility for each of the 20 stocks held.
The higher the expected volatility, the higher the option premium.
Pros and cons of this strategy
YMAX explains that the extra income from option premiums provides a partial hedge against share price falls for YMAX unitholders.
The result is lower volatility in overall returns.
However, writing call options also means YMAX foregoes the benefit of price rises above their options' strike prices.
This is because the option holder is likely to exercise their option if the price goes above the strike price. Alternatively, YMAX may choose to pay to close out the option by repurchasing it at the current market price.
As Betashares explains in its product disclosure statement (pds):
The strategy therefore reduces the downside risk, but also limits the upside potential.
Betashares says YMAX would typically outperform a basic top 20 index-tracking ETF (with no options involved) in "falling, flat and gradually rising markets".
Conversely, YMAX would likely underperform in a strongly rising market, given it has to forgo some capital gains.
YMAX ETF's management fee and expenses total 0.64% of the fund's net asset value (NAV) per annum.
The YMAX ETF is currently $7.57 per unit, down 0.66% on Tuesday.
