Tuesday, 16 February 2021

Choosing ETFs - UK Dividend Share ETFs


If you are going DIY - I recommend Exchange Traded Funds (ETFs) for most of your portfolio. With ETFs, the individual business risks are reduced - because the ETF consists, usually, of many different securities. All you need to worry about is the general 'positioning' of the ETF: dividends or fixed-income and country or geographical region of interest.   

Exchange Traded Funds (ETFs) are diversified bundles of securities based on a particular investment theme. Because they are usually 'passive' funds - managed by computer algorithms - rather than highly-paid financial analysts - they usually come with a low management cost. And once you have bought them, there is nothing to do but mop up the income they provide.

ETFs are now my 'default' form of investment, after some of my own disappointing choices in individual shares and bonds. My experience underlines the truth that investing is difficult and requires quite a lot of work to actually read the annual accounts and study the prospects for individual businesses. Even with a lot of research and preparation, it can all still go pear-shaped. With ETFs, the individual business risks are reduced - because the ETF consists, usually, of many different securities. All you need to worry about is the general 'positioning' of the ETF: dividends or fixed-income and country or geographical region of interest.

So, a more realistic approach for the DIY Income Investor is to accept a lower rate of return, in exchange for a lower risk profile. Less work, but less return. This is not to say that you cannot take the occasional 'punt' on something that looks good to you when the portfolio of ETFs gets too boring - but this should perhaps be the exception, rather than the rule. 

There are literally thousands of ETFs available - but for the DIY Income Investor identifying suitable income-oriented ETFs is not always straightforward. The ETF search tools that I have found are generally not very helpful, as it is rate to find an appropriate category search for income-oriented dividends or bond ETFs.

But sometimes it is given to you on a plate. The Motley Fool has identified three different dividend ETFs covering UK dividend shares - a great starting point for a UK-based DIY Income Investor. And, as the London market is actually quite international, it is a good choice for investors from other countries, too.

The three ETFs identified are:
  • 'Yield Weighted' iShares UK Dividend UCITS ETF (LSE:IUKD).  investing in the 50 highest-yielding stocks from the FTSE 350 Index. 
  • ''Dividend Track Record' SPDR UK Dividend Artistocrats ETF (LSE:UKDV). It only considers companies that have consistently raised or maintained dividend payouts over a period of 10 or more consecutive years.
  • 'Quality Screener' BMO MSCI UK Income Leaders UCITS ETF (LSE: ZILK). It utilises a two step screening process to pick out stocks based on ‘quality’ fundamental attributes, which include a high return on equity, stable year-on-year earnings growth and low financial leverage. 
Each of these ETFs has strengths and weaknesses that are discussed in the article, so you will need to make your own decision on which you feel more comfortable with. I actually hold two of them - IUKD and UKDV, which have different yields and reactions to markets ups and downs. I might well try the third one too, if I need more exposure in the UK.




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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