ETFs to Consider for Income

Having a passive investment strategy does not mean sacrificing dividends.

Kate Lin 28.04.2021
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River stream dividend ETF

Investors love income, especially in the form of dividends, or the distribution of a portion of the company's earnings back to shareholders. Dividends form a (mostly) regular and additional stream of income that could compound over time (if reinvested) in a portfolio.

Christine Benz, Morningstar's Director of Personal Finance, tells us about the different ways of gaining exposure to dividend-paying investments. On the positive side, direct investments in high yielding stocks and bonds enables you to focus on few high-conviction names. However, this approach entails significant research into each individual security, incurs high trading costs and requires some initial capital for a diversified exposure.

There is a single solution for all these problems, though – Exchange Traded Funds, or ETFs. ETFs are hybrid investment vehicles that can offer relatively low-cost exposure to a variety of asset classes and investment strategies. Like traditional mutual funds, most ETFs invest in a diversified portfolio of stocks and bonds. Unlike traditional mutual funds, ETFs trade on a stock exchange. Most ETFs are passively managed, which means they track an index. That said, a growing minority of them are actively managed. Irrespective of whether they are tracking an index or delivering an active strategy, ETFs tend to have lower annual expenses relative to mutual funds. That said, because they trade like stocks, investors should account for transaction costs (commissions, bid-ask spreads, and so on).

ETFs offer a low cost, diversified solution for investors, especially new, or first-time investors. Before we jump into specific ETFs, let’s look at how Morningstar evaluates the products. To expand the number of funds we cover, Morningstar has developed a machine-learning model that uses the decision-making processes of our analysts, their past ratings decisions, and the data used to support those decisions. The rating methodology of Morningstar Quantitative Rating, which is denoted by a superscript Q, is analogous to the rating a Morningstar analyst might assign to the fund if an analyst covered the fund. Both takes a forward-looking perspective that are meant to predict how a fund is going to do in the future based on a rigorous empirical process.

In this article, we look at three income-paying ETFs listed in Hong Kong or Singapore that bears Bronze or better quantitative ratings.

BMO Hong Kong Banks ETF (3143) BronzeQ

Morningstar Category: Sector Equity Financial Services

Investors around the world are taking a closer look at value stocks in the recent months as a switch-out from growth stocks. Specifically, banks carry a notable value approach that is also a typical beneficiary when the rates are set to rise. As progressive vaccination in the region continues, Morningstar analysts see potential upside catalysts for Chinese banks into the next quarters. With the removal of hard GDP growth targets on the mainland, pressure on provincial governments to chase growth is reduced, ultimately allowing the banking system to clear excesses and reduce risk.

This BMO ETF tracks 17 banks listed or operated in Hong Kong. Thus, it takes a major exposure to Chinese large, national banks as well as some local Hong Kong lenders. The ETF currently yields 4.65% and distributes dividend every six months. And, how ‘value’ is it? Price-to-earnings ratio of the index is 7.69x, considerably undervalued as compared to the category average of 13.25x.

BMO MSCI Asia Pacific Real Estate ETF (3121) BronzeQ

Morningstar Category: Property – Indirect Asia

Old economy sectors, including property developers, may not be as exciting as the tech stocks from a capital return perspective. But the income profile of large-cap and stable real estate firms can be appealing.

Another top-rated dividend-paying ETF is also managed under BMO. This instrument exposes investors to large-scale listed real estate companies across Asia-Pacific. The diversified portfolio invests in 111 companies, with top exposure in Japan, China and Hong Kong, each market amounting to a weight of 20-28%. In the past trailing 12 months, investors enjoy a fund yield of 3.4% while the expense ratio is 0.45%, which sits at the lowest fee quintile among its peers. Also, Morningstar’s model has an increased confidence toward BMO’s investment process, leading to an upgrade to Bronze from Neutral in March.

iShares JP Morgan USD Asia Credit Bd ETF (N6M) – GoldQ

Morningstar Category: Asia Bond

Fixed income is a popular hunting ground for regular income and can be captured by passive strategies.

This iShares offering displays a number of positive attributes. Being on the advantageous side of parent Blackrock’s scale and data access, this Asia credit index tracker carries a Gold Quantitative Rating with above average rating in all three pillars: process, people and parent. This ETF instrument, available on the Singapore Exchange, tracks the J.P. Morgan Asia Credit Index – Core in US dollar terms. Composed of more than 60% in corporate bonds with ‘investment grade’, this instrument can complement a broader portfolio that lacks a US dollar bond exposure. In the past year, this ETF yields 2.66%. The ETF’s expense ratio is priced at 0.35%, which is on the cheapest end for similar index products.


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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
iShares JP Morgan USD Asia Credit Bd ETF9.50 USD0.18Rating

About Author

Kate Lin

Kate Lin  is a Data Journalist for Morningstar Asia, and is based in Hong Kong

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