Tuesday 11 December 2012

Corporate Bonds: Going International?

The DIY Income Investor portfolio is doing very well this year, with total return approaching 30%. This has been achieved by a high-yield portfolio equally invested in dividend shares and and various fixed-income securities, all quoted on the London Stock Exchange.

But this return is exceptional and indicates to me the need to review potential risks sitting in the portfolio. One of these is perhaps an over-reliance on the UK market.
Now, the UK stock market offers a huge choice of securities - more than enough to keep me busy for a lifetime - and it will remain the core of my portfolio. Many businesses quoted in London have an international character. But London could potentially be impacted by changes in regulation, currency and investor sentiment.

However, investing in overseas markets has potentially many pitfalls, including currency risks and taxation (such as local withholding tax). Plus trying to get 'up-to-speed' in a range of worldwide exchanges is probably beyond me (and probably most people). So, any financial adventures outside the UK will have to be in the form of a 'collective' investment rather than buying individual securities - and the cheapest way of doing this is via an ETF (Exchange Traded Fund).

As reported by Investor's Chronicle, iShares and State Street's latest launches in the UK are high-yielding bond ETFs:
  • the iShares Global High Yield Bond ETF (HYLD) tracks the Markit iBoxx Global Developed Markets Liquid High Yield Capped Index by investing directly in the underlying bonds. It offers an attractive yield of more than 6% and will distribute dividends twice a year, with a total expense ratio (TER) of only 0.5%.
  • the State Street SPDR BofA Merrill Lynch Emerging Markets Corporate Bond UCITS ETF (EMCB), tracks investment-grade and high-yield emerging market corporate debt, denominated in US dollars. It tracks the BofA Merrill Lynch Emerging Markets Diversified Corporate ex-144a Index. It has a yield to maturity of 4.1% and will also distribute dividends twice a year, with a TER of 0.5%.

Of the two, I like the look of the iShares HYLD ETF, which holds bonds issued by companies in developed markets but rated below investment grade (BBB), which are considered more likely to default than investment-grade bonds. They can therefore be more volatile, but tend to pay a much higher coupon. Currencies include Canadian dollars, Euros, Sterling and US dollars. The index captures the global developed high-yield corporate market by the means of the most liquid high-yield corporate bonds available with a maturities ranging from 1 to 15 years, with a cap of 3% in any one security.
Both ETFs are suitable for ISAs and SIPPs.

I am not a financial adviser and the information provided does not constitute financial advice. You should always do your own research on top of what you learn here to ensure that it's right for your specific circumstances.

No comments:

Post a Comment