Call me fanciful, but I like to think of my selection of ETFs (Exchange Traded Funds) as a bunch of yield-hungry gunslingers roaming the West (and the East, for that matter), looking for easy pickings - much like the Wild Bunch. In fact I could call my 'international' ETFs the Magnificent Seven.
But I digress: gunslingers are usually paid by results, so how have they done? And I've just thrown some more cash in their direction - are they going to make a killing?
Regular readers will recall that I turned to ETFs rather reluctantly, as I don't like paying someone else (like a fund manager) to do what I can do myself (and seemingly more successfully too).
However, I did begin to worry that my life savings were committed to savings and investments denominated solely in UK Sterling, so I began to diversify globally. But this is difficult to do as a small investor due to the tax and currency complications, so I turned to ETFs, which are available in all sorts of styles and which manage the admin side for a (usually) reasonable charge. ETFs also give you instant diversification, which is nice, but have the downside of being more volatile than my usual set of London-based investments.
Being a DIY Income Investor, I have specialised in ETFs that generate income - both from dividend shares and fixed-income investments. My first ETF was based on the UK dividend market (and there are alternatives):
- IUKD: iShares FTSE UK Dividend Plus ETF: the 50 highest-yielding FTSE 350 stocks, excluding investment trusts, selected and weighted by one-year forecast dividend yield.
- ISXF: iShares Markit iBoxx £ Corporate Bond ex-Financials ETF: sterling-denominated, investment-grade corporate bonds, issued by non-financial organisations, with a minimum remaining time to maturity of one year and a minimum amount outstanding of £100 million.
But leaving the UK gunslingers to one side, my Wild Bunch of international ETFs (all quoted on the LSE) consists of :
- Emerging Markets:
- EMDV: SPDR S&P Emerging Markets Dividend ETF
- EMDD: SPDR Barclays Emerging Markets Local Bond UCITS ETF
(Follow the links for more information on these.) As you can see, the ETFs are based on either dividend shares or fixed-income, covering different geographical or currency regions (or the world!).
Overall, ETFs make up 15% of my portfolio and I intend to increase their share as a way of 'banking' the proceeds of my more speculative investments. Of course, ETFs themselves have a degree of primarily market risk, as well as currency risks although they are usually well diversified between different holdings.
In other words, they can still fluctuate in price and therefore in yield - and they have! My own results are quite mixed (current yields based on Bloomberg data):
- IHYG: (current yield) 6.7% - (value change) breaking even
- IDVY: 5.8% - up 8%
- EMDV: 5.8% - down 16.5%
- EMDD: 4.9% - down 6.5%
- IAPD: 4.9% - breaking even
- XGSD: 4.6% - breaking even
- VHYL: yield is not yet reported - breaking even
So, Emerging Markets have not performed at all well - the price has fallen by nearly three-years-worth of dividends!
But my strategy is to top up my holdings when the yields are attractive (i.e. when the prices are depressed), so I have today topped up my holding of EMDV, specialising in Emerging Markets dividends, heavily weighted towards Brazil, Taiwan and China.
The Wild Bunch would be right at home!
[Purchase price: £12.98]
Update 12/12/13: The process has continued: ETFs now make up 30% of the portfolio.
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.
Do you hold the Equity ETFs outside of an ISA ?
I ask because my wife is a basic rate taxpayer and I plan to open ETFs in her name. I believe she will not pay tax on the dividends (which I plan to re-invest immediately anyway)but I understand she still needs to inform the Revenue about dividend payments even though their is no additional paperwork.... is that correct ?
Yes - I hold all these in an ISA or SIPP: the simplest option really from a tax point of view.Delete
Thanks DIY, informative as ever.ReplyDelete
Have you ever considered high dividend yielding Investment Trusts,
or do you prefer ETF's instead of them.
Good question Matt - I have only looked briefly at ITs. My problem with them is that it is not always transparent what they are doing. They often use leverage as well as holding back dividends to cover bad years. Although many of them claim a consistent rising dividend, the rises are often wafer-thin. At least with most ETFs - the ones I use at any rate - the investment process is pretty mechanical and well documented: for better or worse.Delete
Ever thought of opening a USA based $ account and investing in blue chips like Coke, proctor gamble, Johnson & Johnson etc to help with diversification ?
No. The main issue is US/UK taxation - I'd rather let the ETF administrators deal with it. In any case, the yields on the shares you name are not particularly high (although they are clearly good companies)Delete
Interesting to see EMDV has Taiwan as one of its major areas. I live here and considering that 80% of business has relocated to the mainland over the last ten years the economy is shrinking on a yearly basis against higher costs. Most Taiwanese would certainly not invest in the Taiex here these days. They mainly look to the american market to invest in.
I also hold EMDV - a fairly large invesment which has performed very poorly. I have not increased my holding despite my contrarian aspirations for two reasons. Firsty it has a cap of <£50m despite being around for some time now. I have experience of ETFs being forcibly shut down when the cap stays below £100m or so. Also it has a turnover rate rate of 130%! Hardly buy and hold and not great for keeping costs low. Do these isuues not concern you?
Great piece on ETFs. Been looking into EMDV and wondered how you receive the dividend in an ISA. Is it paid gross or net? If net the yield would drop to about 4.4% (still quite attractive)
I assume it is paid gross - but I should check, shouldn't I!Delete