Generate Passive Income With These top ASX ETFs

September 18, 2024
1:51 am
Stock Piper Team

Income investors, especially those looking for a steady stream of returns, might want to explore exchange-traded funds (ETFs) as an option. ETFs have become an excellent tool for investors in recent years, allowing easy access to various global markets with the click of a button. Once difficult and costly, international investing has now become much more accessible, and even niche investment themes are within reach through ETFs.

Among the vast array of ETFs on the Australian Securities Exchange (ASX), some stand out for their ability to generate passive income. This article highlights a few top ASX ETFs that could be ideal for those seeking a reliable income stream.

The Appeal of ASX ETFs

ETFs allow investors to purchase a broad collection of shares in a single transaction, providing diversified exposure to different sectors, regions, or themes. For income-focused investors, this means easy access to companies with a strong track record of paying dividends, such as blue-chip stocks or industry leaders.

Moreover, many ASX-listed ETFs focus on specific strategies like income generation, value investing, or growth, offering something for every type of investor. Let’s dive into some of the top ASX ETFs that stand out for their income potential.

1. Betashares Australian Top 20 Equity Yield Maximiser Fund (ASX: YMAX)

First on the list is the Betashares Australian Top 20 Equity Yield Maximiser Fund. This ETF is designed for investors seeking steady quarterly income and reduced volatility. YMAX achieves this by employing a covered call strategy, which is a popular options trading approach. Essentially, the fund writes call options on its holdings to generate extra income. This works particularly well in a stable or slightly rising market.

YMAX focuses on the 20 largest blue-chip shares on the ASX, giving investors exposure to Australia’s top-performing companies, like Rio Tinto Ltd and National Australia Bank Ltd. The fund's strategy helps to smooth out returns while offering an attractive income stream.

As of now, YMAX boasts an impressive trailing 12-month dividend yield of 7.6%, making it a solid choice for investors focused on passive income generation.

2. Betashares FTSE 100 ETF (ASX: F100)

For those seeking diversification beyond Australia, the Betashares FTSE 100 ETF could be a top contender. This ETF invests in the 100 largest companies listed on the UK stock market, offering exposure to a diverse range of sectors, including financials, consumer staples, industrials, and healthcare.

Unlike many Australian ETFs that are heavily weighted towards banks and miners, the F100 ETF provides exposure to global giants like AstraZeneca, Unilever, Shell, and HSBC, which have strong international growth prospects. This international exposure can offer investors more robust earnings potential over time, compared to focusing solely on Australian companies.

The F100 ETF also boasts a solid dividend yield of 3.5% and has consistently grown its distributions over the past few years, making it a reliable income source.

3. Vanguard Australian Shares Index ETF (ASX: VAS)

Another prominent option for income-seeking investors is the Vanguard Australian Shares Index ETF. This ETF tracks the S&P/ASX 300 Index, which includes the largest 300 companies listed on the ASX. With its broad exposure to the Australian market, VAS is a popular choice for investors looking for income from a wide variety of sectors, including banking, mining, and telecommunications.

VAS owns shares in some of Australia’s highest dividend-paying companies, such as Rio Tinto Ltd, Telstra Group Ltd, and National Australia Bank Ltd. These companies have a history of paying solid dividends, which pass through to the ETF’s investors.

At the end of July 2024, VAS had a dividend yield of 3.5%, which makes it an attractive option for those looking for a relatively stable income source.

4. Betashares FTSE RAFI Australia 200 ETF (ASX: QOZ)

The Betashares FTSE RAFI Australia 200 ETF is another great option for passive income seekers. What sets this ETF apart is its fundamental indexing strategy, which selects and weights stocks based on key financial metrics such as sales, cash flow, dividends, and book value rather than market capitalization.

This screening process ensures that investors hold companies with healthier balance sheets and stronger dividend-paying potential. As a result, the QOZ ETF holds a diversified mix of stable and profitable Australian companies.

The ETF currently provides a trailing dividend yield of 4.7%, making it an appealing option for those looking to invest in financially sound businesses that consistently reward their shareholders.

Generating passive income through ASX ETFs is a compelling strategy for investors looking to build wealth steadily. Whether you prefer the income-maximising approach of covered calls or the stability of fundamental indexing, these ETFs provide diversified exposure to high-quality companies. The Betashares Australian Top 20 Equity Yield Maximiser Fund (YMAX) and Betashares FTSE 100 ETF (F100) stand out for their strong dividend yields, while the Vanguard Australian Shares Index ETF (VAS) and FTSE RAFI Australia 200 ETF (QOZ) offer unique opportunities for diversification and consistent income.

By investing in these ETFs, income investors can enjoy both the benefits of diversification and a steady stream of dividends, making these funds a top choice for those looking to grow their passive income.