Saturday 1 June 2013

Portfolio Buy: Vanguard All-World High Dividend Yield ETF (LSE:VHYL)

Is this the new 'must-have' for the geographically-diversified DIY Income Investor?

We are fortunate in the UK that the LSE is itself pretty international in nature. Having said that, I have been trying to diversify away from the UK. In most cases it is difficult for a UK investor to hold foreign shares directly because of tax complications, in particular, the need to reclaim tax deducted at source. For that reason, I use Exchange Traded Funds (ETFs) to diversify away from the UK - they take care of the tax 'admin' and generally have lower costs than equivalent traditional 'funds' (which are more heavily marketed).

This new Vanguard ETF - the FTSE All-World High Dividend Yield UCITS' ETF - is the most geographically diversified high-yield dividend ETF available on the LSE, with over 1,000 different stocks from around the world. One-third of the ETF is invested in the US, 13% in the UK, over 6% in Australia and so on.

This version of the ETF is denominated in Sterling, making it easier for a UK investor to track.

And, as Vanguard has led the field in providing low-cost ETFs, it is one of the cheapest, with a Total Expense Ratio (TER) of 0.29%.

This ETF "seeks to provide both diversified income and capital appreciation by tracking the performance of the FTSE All-World High Dividend Yield Index, a large- and mid-cap market-capitalisation-weighted index of developed and emerging market common stocks with generally higher than average forecasted dividend yields".

But hold on: what is the yield?

The information sheet provided by Vanguard points to the 4% yield of the underlying index but the ETF itself is too new to have established any statistics. So buying this ETF is a bit of a leap of faith.  Nevertheless, diversification always comes at the cost of lower yield, so - in this case - I am trading security for yield.

Or am I? The underlying index performed FTSE All-World High Dividend Yield Index performed reasonably well over 1 year (with a total return of over 10%) but look at the 5-year return: under 2%!

So, make no mistake, this ETF has its risks: when high-yield dividend shares go bad, the results are not pretty. But given the other advantages it looks like this ETF offers an attractive way to obtain well-diversified global dividend income - as a core holding that does not require much day-to-day attention.

[Purchase price: £32.40]

[Update 1/7/14 - the full year yield is now confirmed as 5.4%, making this a very attractive offering for a DIY Income Investor]

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.

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