Sunday, 29 June 2014

Update on the ETF Strategy (Portfolio Buy)

Regular readers may be aware that I am trying to increase the proportion of Exchange Traded Fund (ETF) holdings in the DIY Income Investor portfolio. With recent sales and this latest purchase (see below), they account for 30% of the portfolio - but I'd like to buy more.

So why am I a fan - and why am I buying some and selling others?

There is an amazing variety of ETFs available. Of interest to me is a very thin slice of the market - those that generate income, by investing in high-yield dividend shares or fixed-income securities; in other words, those that have a yield.

ETFs are usually managed in a fairly mechanical way, with their constituents being based on specific, specialised indices. This helps to keep their management charges low - and turnover is usually minimal. Being based on a fairly large number of individual securities provides some protection from the risk of failure of any single share or bond. The main market risks are those related to the particular class of investment - high yield.

My initial objective was to diversify away from the UK and the Pound Sterling. However, this is tricky to do yourself because of the tax complications; it's also challenging to become familiar with all the possible markets around the world. However, ETFs provide an easy route to world markets, opening up the investment possibilities - the world is your ETF oyster.

My secondary objective was to develop SIPPs for the family, taking advantage of the nice 25% the Taxman adds to a contribution of up to £2880, irrespective of income. I was objective enough to realise that I might not be around for ever to manage these accounts and decided to use solely ETFs in them, so that they would eventually run more or less on autopilot.

But I don't just ignore the ETFs once I buy them: I still expect them to earn their place in the portfolio. The signal to buy or sell remains the yield (as well as taking account of any capital gain). In a sense you can think of any particular ETF as a simple, single unit, rather than analysing too much the complex agglomeration of securities that it really is.

Hence the recent sales of the IUKD ETF (UK dividend shares) and the ISXF ETF (UK non-financial bonds) - the yields of both had fallen to under 4% and a nice capital gain was there for the taking. Neither had reached the more demanding 'sell' signal I normally wait for - but then again, I do not expect ETFs to be as volatile as some of the individual securities I take a punt on.

One complication about ETFs is that I have not yet found an automated source of the latest yields for all the ETFs I hold. I have to resort to manually checking this with my preferred source - Bloomberg. So when recently I checked the yield on SEML (the iShares Emerging Markets Local Government Bond UCITS ETF), the yield had shot up to 6.3%. I've held SEML since November 2013 - but it has never yielded as much. It took me about 15 minutes to buy a shed load, as this ticks two boxes - it is an ETF and fixed-income (which I am a bit short of at the moment).

However, it looks like this was a temporary price dip, due probably to some concerns about sovereign debt defaults. The price has subsequently recovered somewhat, bringing the yield down now to 5.6% - still pretty attractive for a DIY Income Investor

[Purchase price: £49.54]

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. Hi Sisyphus,

    I would suggest you keep an eye on IAPD.

    Periodically, there is some pull-back to around the GBP 19 level, currently trading at 21 GBP,yields around 4% or so, i know, it is a bit lower than your benchmark, but might be worth keeping an eye on.



    1. Hi Vatsa
      Yes, I hold IAPD - still above my 4% 'sell' benchmark and breaking even on capital value. Holding for now.

  2. I think the yield increased due to the strength of Sterling, which has dropped back a bit, after Carney cooled on the interest rate rise. Think I may have missed the opportunity to top-up.