Monday 9 February 2015

Euro If You Want To! (Portfolio Buy)

You row if you want to!


After a bit of profit-taking, selling a directly-held holding in a dividend share, it was time to get back to main strategy: ramping up the ETFs (Exchange Traded Funds).

I'm not sure I'm going to get much richer investing in ETFs - but that's not the objective. Most investors who have been reasonably successful - and have accumulated a sizeable nest-egg - are probably more interested in retaining what they have, rather than trying to accumulate a lot more.

It also makes the portfolio easier to manage. The only trouble is that ETFs are a bit boring...

ETFs are low-cost investment packages usually based on a published index - some weird and whacky, but some just right for a DIY Income Investor. Usually, they are well diversified, which is what we want - for a measure of safety.

As regular readers will know, I use the market's own assessment of risk - in the form of yield - to help me identify potential investments. Then I do a quick due diligence of my own to decide whether I think the risk perception is overdone. This doesn't work all the time, but it does work frequently enough for me to make money out of it.

As usual when looking to buy something for the portfolio, I scanned my existing holdings to check how they are doing. I have already identified my target investment as an ETF - but this leaves me with two possible main types: dividend shares or fixed-income and lots of possible geographical options. My portfolio is over 61% dividend-based, so preferably I would like something in the fixed-income ETF universe.

My highest-yielding ETF is currently SEML (Emerging Markets Local Government Bonds) - currently yielding over 5.7%: but I think I have enough exposure to that particular market. Then I checked out my recent review of London's income-oriented ETFs. The yields have changed since I wrote it, but it was easy enough to click on a few of them to update.

The one that caught my eye was SHYG - iShares' Euro High Yield Corporate Bond ETF, with an attractive yield of 5.4% (that's a couple of days ago - it's a bit higher now). This is the Stirling version of the IHYG ETF denominated in Euros, of which I already hold a lot. Why the yields are different is something I am still trying to work out (presumably the depreciation of the Euro explains it).

A couple of thoughts struck me:
  • Why is this yield still so high, after the ECB announced a huge bond purchase programme?
  • What are the risks associated with Grexit? (Greek exit from the Euro)?
  • I do already hold a a lot of Euro fixed-income ETF (IHYG).
  • The Euro is currently 'cheap' compared to Sterling.

My conclusion was that the fall in value in the Euro plus the Greek election result had depressed market sentiment to the point where the underlying Euro bonds were being hammered - and therefore probably undervalued. Moreover Euro QE will probably boost the price of all Euro bonds. Finally, Grexit will probably boost Euro bonds as well - as international investors re-enter the Euro market.

So I bought - making this my biggest holding of all, by far in the portfolio (around 8%). I don't expect a quick return and I may well be wrong, of course - after all, I'm just an amateur dabbler - so make your own decisions.

[Purchase price: £82.49]

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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