Want passive income? This simple ETF strategy makes it easier than most people think

Building passive income is often made to sound far more complicated than it needs to be.

Many Australians assume it requires years of saving, deep knowledge of stock selection, or the ability to predict interest rates and economic cycles. That belief alone stops plenty of people from starting.

In reality, building a passive income portfolio can be remarkably simple. 

With a small starting balance, a handful of diversified ETFs, and a commitment to consistency, investors can begin today — even with as little as $500.

Keep it simple

One of the biggest advantages of exchange-traded funds (ETFs) is diversification. Rather than relying on the fortunes of a few individual companies, an ETF provides exposure to dozens or even hundreds of businesses in a single investment.

That diversification helps smooth returns and typically reduces volatility compared to holding a concentrated portfolio of individual shares. It also removes the pressure to “get it right” by picking winners.

For passive income investors, this means fewer decisions, less stress, and a smoother ride over time.

Low cost, easy to buy, easy to stick with

ETFs are also designed for simplicity.

They tend to have low management fees, keeping more of your money invested and compounding. Buying an ETF is no more difficult than purchasing a single share, and most brokers allow investors to start with relatively small amounts.

Crucially, ETFs encourage good behaviour. By spreading risk and reducing complexity, they make it easier to stay invested and avoid reacting emotionally to short-term market movements.

That discipline often matters far more than clever strategy.

Two ETFs that show how passive income investing works

To see how this approach can look in practice, it helps to consider a couple of well-known income-focused ETFs.

The Vanguard Australian Shares High Yield ETF (ASX: VHY) takes a straightforward approach to passive income. It invests in Australian companies with higher-than-average forecast dividend yields, resulting in a portfolio dominated by established blue-chip businesses such as banks, miners, and large industrial companies. Income is generated through dividends, often with the added benefit of franking credits. For many investors, this makes VHY a simple way to access reliable income from familiar Australian companies.

The BetaShares S&P 500 Yield Maximiser Fund (ASX: UMAX) uses a different strategy. It provides exposure to the 500 largest US companies while employing a covered-call strategy to generate additional income. This approach aims to deliver higher regular distributions and reduce portfolio volatility. The trade-off is that returns may be capped during strong market rallies, making UMAX more suitable for investors focused on income rather than maximum growth.

Together, these ETFs highlight how different income strategies can be packaged into simple, easy-to-buy investments without requiring investors to manage the complexity themselves.

Time and discipline do the heavy lifting

The real driver of passive income success is not trying to outsmart the market. It is time.

By investing regularly through dollar-cost averaging, investors spread their purchases across different market conditions. Reinvesting dividends compounds the effect by steadily increasing the number of units owned, which in turn generates more income over time.

At first, progress can feel slow. Over the years, however, compounding begins to accelerate, and the portfolio increasingly does the work on your behalf.

Foolish Takeaway

Building passive income does not require perfect timing, deep expertise, or large sums of money.

By automating regular investments into diversified ETFs, reinvesting income, and staying disciplined, investors can turn time into their most powerful ally. Starting small is not a disadvantage — it is simply the first step.

The post Want passive income? This simple ETF strategy makes it easier than most people think appeared first on The Motley Fool Australia.

More reading

• 3 strong ASX ETFs to buy for passive income
• Vanguard reveals next lot of dividends for VAS and other ASX ETFs
• The ASX dividend portfolio I’d build for financial independence
• The three ETFs I’d buy to set up a starter portfolio
• Is the Vanguard Australian Shares Index ETF (VAS) the best way to invest in ASX shares?

Motley Fool contributor Leigh Gant 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 positions in and has recommended BetaShares S&P 500 Yield Maximiser Fund. The Motley Fool Australia has recommended Vanguard Australian Shares High Yield ETF. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.