Russell Investments High Dividend Australian Shares ETF (ASX:RDV) Portfolio Manager, James Harwood talks about how the company's ETF varies from other high yield funds and how it can improve performance of an existing portfolio.
Jessica Amir: Hi I’m Jessica Amir for the Finance News Network with Russell Investments High Dividend Australian Shares ETF (ASX:RDV), Portfolio Manager, James Harwood. Hi James, welcome to the Network.
James Harwood: Thanks Jessica, hello.
Jessica Amir: For investors new to your ETF, just give us a quick introduction?
James Harwood: RDV is a very mature ETF by Australian standards. It’s been around for eight years and it was the first equity income ETF that was listed on the Australian Stock Exchange. RDV provides advisers and their clients with above average income, and exposure to the equity market. We’re aiming for around one per cent above the broad market and right now, that’s around 5.5 per cent yield.
Jessica Amir: James just a little bit more detail on the ETF, including composition?
James Harwood: RDV is currently holds 49 stocks inthe portfolio and they all come from the large cap part of the market. When building the portfolio for RDV we were actually using something called a composite yield score. And there we are actually usingfive different inputs to essentially grade how good a company’s yield is. We think it’s really important to have multiple measures of yield. We just don’t want to be looking in the rear-view mirror and looking at backward looking dividends or what a company has paid.
We think it’s really important to look at future dividends or forecast dividends. And one of the pieces of RDV’s methodology is to actually use forecast dividends so we take the three-year forecast dividends from analysts, for all the stocks in the universe and obviously score according to those that are paying the better dividends.
We also look at forecast growth as well and forecast dividend growth. We don’t just want to be exposed to bond like proxies, like Telstra Corporation Limited (ASX:TLS).
Telstra’s paid a very static dividend over the last few years, but it’s not grown and it’s seen its share price fall consequently. We also need to be exposed to the growth part of market as well.
One of the most recent buys for RDV, a big weight increase at the last rebate balance, was Fortescue Metals Group Limited (ASX:FMG).
The last thing is really franking credits and looking at after-tax returns. We know that a lot of investorshold RDV within self-managed superfunds, and they really care about franking credits. So when we’re scoring a company’s yield credentials, we’re looking at the grossed up yields, essentially what the yield is after franking credits. And consequently, RDV has a preference for stocks that pay fully franked dividends.
Jessica Amir: What benefits do ETFs have in general above managed funds?
James Harwood: ETFs have a couple of obvious advantages to managed funds, and the first is cost. RDV, the annual fee for RDV is 34 basis points and that’ll compare to a typical equity income fund, of around one per cent. So if you’re holding RDV over the long-term, those savings can annualise and really accrue a lot to returns, over time.
The second point I’d make is around transparency. Any ETF is actually required to disclose its holdings on a daily basis, through our website. So an investor in RDV can go to our website, download their holdings and there’s complete transparency. And that’s completely different to a managed fund, whereby the manager might disclose the top holdings. But they certainly wouldn’t disclose all holdings, at best on an annualised basis.
Jessica Amir: Sometimes there’s a reluctance to go into new products, but ETFs have seen a massive explosion of funds under management. Maybe you can tell us about that?
James Harwood: The Australian ETF market is really at a different growth cycle from other markets like the US or in Europe. It’s still very early days for the Australian ETF market and that’s why we’re seeing growth rates, of things like 40 per cent per annum. When you compare that to the US or Europe, they’re much more mature markets. But we are really starting to see advisers and clients, become comfortable with ETFs and they’re forming a greater part of their overall portfolio as that confidence in the product grows.
Jessica Amir: Lastly now James. What can investors expect if they make an investment in RDV?
James Harwood: RDV provides investors with broad exposure to the Australian equity market, and above average yields. Investors will get around 5.5 per cent of a net yield, grossed up for franking credits, that’s going to be well above seven per cent. And that compares really favourably with the broad market and also, it’s more than double what term deposits will pay investors. I think that’s important. The market doesn’t actually need to go anywhere, it can stand still as it’s done for the last 12 months. But because of that high yield, investors are rewarded with a return that’s much better than just leaving it in cash.
Jessica Amir: James Harwood, thank you so much for the insights and for your time.
James Harwood: Thank you.