Morningstar dumps Aussie yield ETF play from coverage

An ETF aimed at providing regular income by tracking the top 20 ASX companies has been stripped of Morningstar coverage following poor performance and high fees. 

Morningstar has ceased coverage of BetaShares' "yield maximiser" passive exchange-traded fund (ASX: YMAX), and will reallocate resources to other strategies with “stronger investment merit”.

Morningstar will also cease coverage on the iShares MSCI Japan ETF (ASX: IJP), iShares China Large-Cap ETF (ASX: IZZ), citing weak client demand as another reason for their omission.

BetaShares YMAX holdings span key sectors of the Australian economy and includes the big four banks, Macquarie, IAG and Suncorp; materials big-names BHP, Rio Tinto, and Amcor; consumer names Woolworths and Wesfarmers; tollroad operator Transurban and biotech CSL.

According to BetaShares, YMAX seeks to provide investors with exposure to the largest 20 blue-chip Australian shocks, while providing "attractive quarterly income that exceeds the dividend yield of the portfolio of underlying shares over the medium term". The Fund aims to provide lower overall volatility than the underlying share portfolio.

However, since its inception in late November 2012, YMAX has delivered 6.61 per cent a year, whereas the Australia 20 index has delivered 10.12 per cent, BetaShares says on the fund prospectus.

Investment Growth | BetaShares Aus Top 20 Eq Yld Mxmsr ETF YMAX

Source: Morningstar Direct

YMAX has a base management fee of 0.59 per cent but additional expenses take the overall cost to as much as 0.76 per cent. Morningstar Analyst Donna Lopata says this makes it expensive for passive strategy.

"Fee competition has intensified, and, as a result, active option-writing rivals have eroded YMAX’s cost advantage," she says.

"YMAX is also far more expensive than passive dividend ETFs, which can cost as little as 0.25 per cent."

The dumping of YMAX comes at a time when ETF inflows are at record highs and interest rates are at record lows.

Morningstar began coverage of YMAX in August 2014 with a Neutral rating.

’We have concerns’

YMAX has been sitting on a Negative rating from Morningstar analysts since March 2019, with Negative ratings applied across three of the five pillars – Performance, Price and Process.

Lopata considers YMAX's rules-based process to be at a disadvantage compared with active peers.

"BetaShares’ YMAX delivers income, but we have concerns with this strategy," she says.

"YMAX offers a top 20 Australian equities portfolio with call options systematically sold over 80 per cent of these holdings.

"Selling call options over stocks in the portfolio adds income but sacrifices capital upside.

"We consider YMAX’s rules-based process to be at a disadvantage when compared with the greater fluidity offered by active manager peers, whose fundamental analysis can inform their stock selection and call-writing decisions."

An option contract gives the owner of a security the right to buy a specific number of shares at a specific price, within a specified period. Buyers use call options when they think a stock will go up in value.

Trailing Returns | BetaShares Aus Top 20 Eq Yld Mxmsr ETF YMAX

Source: Morningstar Direct

Lopata says total returns for the fund were also "unimpressive", lagging behind most ultra-low-cost high-dividend exchange-traded funds, active buy-write rivals and the S&P/ASX 20. 

"Given YMAX’s multifaceted approach, it is relevant to compare the fund with a variety of yardsticks; however, our previous reports observed that no matter what comparison we made, YMAX’s total returns were unimpressive," she says.

"Things haven’t improved, and, measured from inception to 31 January 2019, total returns have lagged the S&P/ASX 20, the reference portfolio benchmark.

Related article: Sizing up Australian dividend ETFs

"Whilst YMAX has created generous annual distributions, its annual returns have averaged only 2.59 per cent over the five years to 31 Jan 2019, suggesting this has been at the cost of capital upside."

Since inception, the fund has gathered $320 million in net assets. This makes one of the largest specialty income ETF on the ASX, but laggs the Vanguard Australian Shares High Yield ETF (ASX: VHY). Last year, VHY returned 20.53 per cent to YMAX's 13.72 per cent.

BetaShares offers a series of income strategies, including the US equity option-writing strategy, S&P 500 Yield Maximiser (ASX: UMAX), and an equity dividend-stripping strategy, Australian Harvester Fund (ASX: HVST), which boosts income and franking credits by trading stocks around ex dividend dates. UMAX and HVST are not covered by Morningstar.

When it comes to these income strategies, Lopata says reading the fine print is imperative.

"Many product names use ’income’, ‘dividend’, or ‘imputation’, yet the strategies vary in cost, complexity, and risk/return profile," she says.

Income focussed equity ETFs trading on the ASX

Source: Morningstar Direct

Coverage expansion

Morningstar analysts have expanded their coverage of the Australian ETF market to 71 funds over the last two years, representing over 75 per cent of the market (as measured by net assets). This reflects the growth of the ETF market from $36 billion in 2017 to $66 billion today.

Analysts added research coverage of 14 ETPS in 2018, including strategic-beta offering BetaShares ETSE RAFI US 1000 ETF (ASX: QUS), iShares Edge MSCI World Multifactor ETF (ASX: WDMF), and the SPDR MSCI World Quality Mix (ASX: QMIX).

In early 20919, analysts also added new coverage of the Vanguard Global Aggregate Bond Index (Hedged) ETF (ASX: VBND).

In the past two years, Morningstar has dumped three ETF Securities products from coverage:

• ETFS S&P 500 High Yield Low Volatility ETF (ASX: ZYUS)
• ETFS S&P/ASX 300 High Yield Plus ETF (ASX: ZYAU)
• ETFS S&P/ASX 100 ETF ZOZI

This was primarily due to small funds under management, which raised questions about viability and sufficient economies of scale. ZOZI was terminated by the provider in late 2018.

"We think this will reflect the landscape over the next few years; even as the overall ETP market continues to grow, smaller funds that haven't gained enough assets after a requisite period of time will eventually get terminated," former Morningstar associate director Alex Prineas says.

Morningstar will continue to gather and publish data for the dropped funds alongside star ratings. The star rating is a purely mathematical measure that shows how well a fund's past returns have compensated shareholders for risk it has taken on.