High-dividend funds underperform Australian market


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Yield funds that harvest high dividends were all the rage 12 months ago but they have typically underperformed the Australian sharemarket over the past year.

This highlights the need for investors to understand the strategies used by managers to produce income from shares.

Of the six dividend-focused exchange traded funds (ETFs) listed on the ASX, all recorded a negative performance, averaging -2.8%, over the 12 months to the end of March.

yield funds

This is 5.5% below the performance of a broad-based market-cap Australian share ETFs such as Vanguard's Australian Shares Index fund, which tracks the S&P/ASX 300.

These "smart beta" ETFs were snapped up by investors who want an income, such as retirees.

But dividend and value-focused strategies performed poorly. They typically hold higher investments in bank shares, which have lost ground thanks to a slowing home loan market and the negative publicity generated by royal commission into misconduct in the banking, superannuation and financial services industry.

High-yield funds also have big holdings in telecom stocks such as Telstra, which have been out of favour. As well they hold real estate investment trusts, which are seen as a "bond proxy" and have lost ground as global interest rates rise.

"Smart-beta ETFs gives investors the ability to tilt their portfolios towards certain factors," said Chris Brycki, CEO and founder of Stockspot at the launch of the group's annual ETF report.

"But if you are considering investing in a smart-beta ETF, it is important to understand that you are actually taking bets on certain market factors beating others."

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Susan has been a finance journalist for more than 30 years, beginning at the Australian Financial Review before moving to the Sydney Morning Herald. She edited a superannuation magazine, Superfunds, for the Association of Superannuation Funds of Australia, and writes regularly on superannuation and managed funds. She's also author of the best-selling book Women and Money.

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