Saturday 12 October 2013

A Yield Mirage? (Portfolio Buy)

It may not be what it seems...
Just to show I am 'walking the walk' and not just 'talking the talk', the latest addition to my DIY Income Investor portfolio is another Exchange Traded Fund (ETF).

It meets the criteria of producing income and not being UK-based, increasing both the portfolio's geographical diversification ... and its passivity.

What makes this buy unusual (for an ETF) is the yield - currently 6.2%, according to Bloomberg (making it higher than my portfolio average of 5.5%): and my simple strategy for buying ETFs is to follow the highest yields in my chosen type of vehicle - those that produce income.

The downside (there has to be one - or rather two) is that it is an investment in US corporate bonds - so it involves an exposure to both currency risk and US interest rate risk.

The ETF is the iShares $ High Yield Corporate Bond UCITS ETF which aims to track the performance of the Markit iBoxx USD Liquid High Yield Capped Index. 

To quote iShares:

The ETF invests in physical index securities. The Markit iBoxx USD Liquid High Yield Capped Index is designed to provide a balanced representation of the US Dollar high yield corporate market by the means of the most liquid high yield corporate bonds available  [...] The maximum original time to maturity is 15 years and the minimum time to maturity is 1.5 years for new bonds to be included and 1 year for bonds that already exist in the index. For diversification purposes the weight of each issuer in the index is capped at 3%.

It is, obviously, priced in US$ (US Dollars) but quoted in London in UK£ (Sterling).

On the currency issue: it is a difficult time for the US, with their legislators seeming unable to agree on a budget and (potentially) a debt ceiling. The US Dollar is sagging, so this seems like a good time to buy US assets.

On the interest-rate risk: it seems to be the accepted wisdom today that fixed-income securities are heading for a fall with the QE 'tapering' - the reduction of government debt purchases.

But there might be some strange results - in the form of a kind of yield mirage effect. The current UK£  yield is attractive. If the value of the US$ falls in relation to the UK£, this will affect both capital and income, so although the UK£ income will actually fall, so will the UK£ capital value, and the yield could remain the same. Alternatively, if the US$ capital value of the securities falls (due to 'tapering'), the US$ yield will rise (at least in the short term).

And then I could buy some more. Possibly.

[Purchase price: £70.43.]

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.

1 comment:

  1. I'm not sure where you're getting the idea that this investment SHYU is likely to provide 6.2% yield? I've held it since Jan 17th and as at Oct 16th it has provided a 3.09% yield and 0.25% capital gain making a total of 3.35% with just one quarter to go? SHYG has paid 6.78% dividend to date but with a capital loss of -1.66% making a net return of 5.42%. The fact of the matter is that tapering IS GOING TO REDUCE LIKE IT OR NOT and the condequence of this is likely to be reduced bond ETF returns. Michael