This new ETF aims to pay high monthly dividends, helped along by gearing

If you’re looking for an exchange-traded fund (ETF) that pays out good dividends on a regular basis, this new ETF from Betashares might be just the thing.

Betashares has just launched its Australian Enhanced Credit Income Complex ETF (ASX: ECRD), which aims to fill a need for regular income in investors’ portfolios.

New product to fill a gap

Portfolio manager Jing Jia said the new ETF was “designed as a compelling portfolio solution for investors seeking income”.

Mr Jia added:

In an environment of declining investment income, with equity dividend yields trending lower and the gradual phase out of Australian bank hybrids, many investors are looking for ways to fill the income gap in their portfolios. With major bank hybrids historically offered franked yields of 2 to 2.5% above the RBA cash rate, it’s been difficult trying to find alternatives that deliver comparable income with similar risk profiles.

Mr Jia said investment bonds typically did not offer enough yield, while shares came with significantly higher risk and volatility.

Neither option seems to adequately replace what hybrids have offered. This income gap can be a real problem for investors who need regular cash flow from their portfolios. Betashares’ latest innovation, ECRD, could be seen as a true evolution in the Australian credit income landscape. It’s been designed to deliver hybrid-like income levels with a similar volatility profile.

Mr Jia said it is estimated that ECRD will typically yield 2% to 3% above the Reserve Bank of Australia cash rate, with distributions paid monthly.

It delivers this compelling yield by enhancing the income from a diversified portfolio of investment grade Australia bonds. ECRD boosts the income potential and seeks to earn a net interest margin by using internal gearing at institutional borrowing rates. ECRD reduces interest rate risk by holding only floating rate and interest rate hedged bonds.

Mr Jia said the current running yield for ECRD was 7.15% per annum.

Gearing adds potential risk

The ECRD overview says the ETF will have a gearing ratio of between 66.7% and 71.4%, which “means that the fund’s geared exposure is anticipated to vary between about 300% and 350% of the fund’s net asset value on a given day”.

The fact sheet adds that the investment is not for everyone:

Gearing magnifies gains and losses and may not be a suitable strategy for all investors. Investors in geared strategies should be willing to accept higher levels of investment volatility and potentially large moves (both up and down) in the value of their investment. Geared investments involve significantly higher risk than non-geared investments.

The post This new ETF aims to pay high monthly dividends, helped along by gearing appeared first on The Motley Fool Australia.

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Motley Fool contributor Cameron England has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.