For investors looking to build income alongside capital growth, ASX exchange traded funds (ETFs) could be the answer.
They help by spreading income exposure across dozens or even hundreds of underlying assets, reducing reliance on any single company.
But which funds could be worth considering for passive income? Let's take a look at four top options. They are as follows:
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Vanguard Australian Shares High Yield ETF (ASX: VHY)
The Vanguard Australian Shares High Yield ETF is one of the most straightforward income ETFs on the ASX.
It invests in Australian shares with above-average dividend yields, drawing heavily from sectors such as banks, resources, and consumer staples. That means income is supported by businesses that are already significant dividend payers rather than speculative cash flows.
This provides exposure to franked dividends and spreads risk across many of the ASX's major income contributors, making it a potential core holding for Australian-focused income portfolios.
Betashares S&P/ASX Australian Shares High Yield ETF (ASX: HYLD)
Another ASX ETF to look at is the Betashares S&P/ASX Australian Shares High Yield ETF.
It seeks to improve on traditional high-dividend strategies by aiming to screen out potential dividend traps. This includes companies projected to pay unsustainably high dividend yields, as well as companies that exhibit high levels of volatility relative to their forecast dividend payout.
Among its holdings are the big four banks, Australia's largest miners, and the country's leading retailers.
Betashares Global Royalties ETF (ASX: ROYL)
The Betashares Global Royalties ETF is the third ASX ETF to look at for passive income.
This fund invests in shares that earn royalties from assets such as intellectual property, music, energy infrastructure, and natural resources. These royalty models often produce recurring revenue without the need for heavy ongoing capital investment.
For income investors, this ETF provides diversification away from traditional dividends. Its cash flows are linked to usage and production rather than company profits alone. This can help smooth income across cycles and add a different dimension to a passive income portfolio.
Betashares S&P 500 Yield Maximiser ETF (ASX: UMAX)
Finally, the Betashares S&P 500 Yield Maximiser ETF generates income in a very different way.
Rather than relying purely on dividends, the ETF uses a covered call strategy over US equities to generate option premium income. This can result in relatively high and regular distributions, even when underlying markets are moving sideways.
The trade-off is that upside is capped in strong market rallies. However, for investors prioritising income over capital growth, this fund can provide an additional income stream that behaves differently from traditional dividend ETFs.
