Regular readers may be aware that I have developed a new comprehensive approach designed to deal with eventual inheritance issues. This is not my favourite subject, as it deals with something that I won't be around to enjoy, but is a necessary part of modern family financial planning.
One element of this was investing in SIPPs for my kids. Here's an update...
I've decided on SIPPs for three main reasons:
- the money is immediately outside my (and my wife's) estate [as I understand it - DYOR]
- the kids cannot fritter away the money (until they are older and wiser)
- the Taxman pays you to do it, although there is a pretty tight limit on the amount that benefits from this unexpected largesse: an initial payment of up to £2880 grows, after a month or two of bureaucracy, by a tax-free 25%. Nice - somehow that is the most attractive feature...
What is more, with job pensions becoming less and less generous, this additional pension should make their later lives (and the lives of our putative grandchildren) more comfortable.
The challenge here is one that I am working on in the wider DIY Income Investor portfolio: how to develop an investment process that requires less and less input - and, in the event of my own exit from this world, minimal administration for the family.
The strategy that I am trying out is geographically diversified high-yield income-oriented Exchange Traded Funds (ETFs .- in this case high-yield dividend shares or high-yield bonds. These ETFs consist of diversified holdings but follow, more or less mechanically, a specific benchmark index. I am working on the theory that the highest-yield ETFs of this type indicate that they are out of favour with the market, and so may provide some capital gain *IF* (err.. that is a big 'if', by the way) the market is over-cautious. (On the other hand they may slump in value.)
What to buy?
So, back to the SIPPs. There was no particular difficulty opening two of them (one of them a 'Junior SIPP') for my two kids: I used AJ Bell YouInvest because I was familiar with its forerunner iSIPP.
The next step was to decide what to invest in. I chose to continue the broad allocation of the DIY Income Investor portfolio and split the amount into two chunks: one oriented to high-yield dividend shares and one aimed at high-yield bonds. Taking my money to the London Stock Exchange (LSE) the choices were:
- VHYL: the Vanguard FTSE All-World High Dividend Yield UCITS' ETF, which I have discussed previously here.
- SHYU: the iShares $ High Yield Corporate Bond UCITS ETF, which I have discussed previously here
VHYL is the most geographically diversified high-yield dividend ETF available on the LSE, with over 1,000 different stocks from around the world. 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". 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%.
But hold on: what is the yield? Bloomberg is quoting it currently as 2.5%: however, the information sheet provided by Vanguard points to the 4% yield of the underlying index. The problem appears to be that the ETF itself is too new to have established a full 12 months of statistics - so I expect this 'trailing 12 months' yield to increase. Nevertheless, diversification always comes at the cost of lower yield, so - in this case particularly - I am trading security for yield.
The SHYU ETF aims to track the performance of the Markit iBoxx USD Liquid High Yield Capped Index, which 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 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.
The current yield is around 6% - quite high for an ETF. 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).
Rinse and repeat...
So, that's the the plan. Bear in mind that this is not yet a complete SIPP portfolio but just the starting point. Given that the new year tax year beings soon, I'll be able to top up again with some new ETFs to continue the high-yield / low-maintenance / diversification theme.
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.