How to generate passive income from ASX ETFs

You don't just have to invest in the big four banks for their dividends. ETFs can help generate income.

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The Australian share market is a great tool for investors that want to generate passive income.

And if you're not a fan of stock picking, don't worry.

That's because there are exchange traded funds (ETFs) out there that allow you to avoid picking individual stocks and focus purely on income generation.

Which ASX ETFs could be used to generate passive income?

The team at Betashares has been looking at the different options that investors have available to them and have picked out a few to consider.

The first group of ASX ETFs we will look at are equity income options. It commented:

Equity income can provide an attractive income stream from a portfolio of equities, often with distributions paid monthly or quarterly. Some strategies may offer tax advantages, such as franking credits, helping investors maximise their after-tax returns. Investors may benefit from potential appreciation in the value of the underlying stocks.

The fund manager has picked out the Betashares Australian Top 20 Equity Yield Maximiser Fund (ASX: YMAX) and the Betashares Global Income Leaders ETF (ASX: INCM) as two to consider.

In respect to the former, it aims to produce attractive quarterly income and reduce the volatility of portfolio returns through a covered call strategy over a portfolio of the 20 largest blue chip shares listed on the local share market.

Whereas the Betashares Global Income Leaders ETF aims to track the performance of an index that comprises 100 high-yielding global companies (excluding Australia) that are selected for their potential to generate attractive and sustainable income.

Don't forget hybrids

Betashares also highlights that hybrids could be used to generate passive income. It said:

Hybrids generally offer a higher level of income than shares or fixed income, with a greater level of capital stability than shares. They can offer franking credits, improving after-tax returns. Betashares' hybrid funds pay distributions monthly.

One is the Active Australian Hybrids Fund (ASX: HBRD). It aims to provide investors with attractive income returns from an actively managed, diversified portfolio of primarily hybrid securities.

It pays income monthly at a rate expected to be significantly higher than cash and senior bonds, along with franking credits.

Fixed income

Another option for income investors to consider with ASX ETFs is fixed income. Betashares notes:

Fixed income typically offers a higher level of capital stability than equities. Some types of fixed income, particularly long-term government bonds, may offer a negative correlation to equities. This means that the value of the bonds increases as share prices fall, helping to smooth out volatility. It offers a consistent, and more predictable income compared to share dividends, with distributions paid monthly or quarterly.

It is tipping Betashares Australian Composite Bond ETF (ASX: OZBD) and BetaShares Australian Government Bond ETF (ASX: AGVT) as two to consider buying.

OZBD is designed to be a core portfolio allocation for fixed income, aiming to track the performance of an index that provides exposure to a diversified portfolio of high-quality Australian corporate and government bonds.

Whereas the BetaShares Australian Government Bond ETF aims to track the performance of an index providing investors with exposure to a portfolio of high-quality bonds issued by Australian federal and state governments.

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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