Following the 2008 global financial crisis, a growing number of Australians have sought to shield themselves from market volatility and seek yield-orientated investments. This, coupled with Australia’s ageing population and the growing popularity of SMSFs as an investment vehicle, has contributed to an increasing number of Australians seeking to build portfolios that deliver reliable income streams.
The Australian Taxation Office’s June 2016 SMSF statistical report shows SMSFs invest an average of just 0.3 per cent of their capital in overseas shares, with the bulk of their assets in cash (26 per cent) and Australian equities (30 per cent). Underpinning this home bias is a range of administrative and financial barriers that have traditionally discouraged investors from accessing overseas markets.
For investors, high-yield investments offer the potential for greater stability in periods of heightened market volatility. In Australia, investing for income has long been a popular strategy as investors look to reap the rewards of the tax benefits from our dividend franking regime. However, one of the greatest benefits of a yield-oriented approach is the ability for risk-conscious investors to achieve more stable returns without the need to sacrifice overall performance.
In the current low interest rate environment, it has become increasingly difficult to find high-yielding assets in Australia while also maintaining adequate levels of sector diversification. Cash and bond yields have also remained low and dividend growth has been limited as corporate earnings growth continues to lag the long-term trend. For Australian investors looking for high-yield opportunities, the share market remains highly concentrated across a small number of sectors and is dominated by a few large companies – a combination that gives rise to high levels of concentration risk.
Through diversifying offshore via a global income exchange-traded fund (ETF), investors can access the income-generating potential of some of the world’s most stable and profitable companies, while also reducing some risk through diversification across companies, sectors, markets and regional economic cycles.
SMSFs that look offshore for high-yield investments have the potential to significantly enhance overall portfolio performance. For example, by investing in the SPDR S&P Global Dividend Fund, investors have the opportunity to access a vastly increased number of sectors and industries. Importantly, this includes sectors and industries that are typically unavailable or not very well represented in Australia, such as utilities and technology.
Along with access to more sectors, diversifying away from Australia can resolve concentration risk and allow investors to create stable income streams from a diverse range of companies. The SPDR S&P Global Dividend Fund follows the benchmark of the S&P Global Dividend Aristocrat Index, which is a rules-based benchmark that restricts the companies it includes via strict criteria.
In an environment where global markets are volatile, the S&P Global Dividend Aristocrat Index follows a strict methodology to ensure the companies it invests in are able to deliver consistent and stable dividends. The index is designed to measure the performance of high dividend-yield companies in the S&P Global Broad Market Index that have followed a managed dividends policy of increasing or stable dividends for at least 10 consecutive years.
Access to this index can allow SMSFs to introduce an element of quality to their portfolios. A company that has shown the ability to consistently grow its dividend over time can indicate it is operating in a relatively stable, non-cyclical industry.
Investing globally through a locally domiciled ETF can also dampen one of the greatest frustrations associated with investing internationally – administration. Like Australian equities, Australian-domiciled ETFs can be bought and sold on the ASX and can sit in the same account as single shares.
Locally domiciled global ETFs have the same simplicity and transparency as an investment in Australian shares and there are also no United States tax forms to fill out. In fact, tax statements for locally domiciled global ETFs are formatted the same as Australian equities ETF tax statements, meaning they can be easily integrated when it comes to tax time.
In a time of historically low interest rates and volatile markets, the emergence of global income ETFs, like the SPDR S&P Global Dividend Fund, can allow investors to participate in rising equity markets and create stable income streams with the potential for less volatility. In particular, global income ETFs offer a cost-effective and easily administered vehicle for offshore diversification without the complexities of a direct investment.
Shaun Parkin is head of SPDR ETFs at State Street Global Advisors Australia.