ETF Exchange Traded Funds (ETFs) 2015

Based on some previous posts and not having to consider hedging currency risk for quite sometime due to holding actively hedged LIC PMC I thought it worthwhile to get more up to date on the subject. As a result I have to admit to changing my view towards currency hedging for commodity oriented countries such as Australia and Canada. That is unhedged is recommended. Some extracts from below links provide very convincing reasoning for this stance.

Before going to those however I discussed the hedging issue with Vanguard. It appears as expected that hedging can at times have a much bigger impact on returns other than the extra 3 basis points MER relative to the unhedged International share fund. It is an eye opener if you compare distribution (income) consistency and reliability of unhedged (pretty good) vs hedged (terrible) as follows:

https://www.vanguardinvestments.com.au/retail/ret/investments/income-distribution-rtl.jsp?fundId=8

https://www.vanguardinvestments.com.au/retail/ret/investments/income-distribution-rtl.jsp?fundId=7

Note however that when erratic hedged fund distributions were paid some were quite sizeable.

"In another analysis, researchers at J.P. Morgan Asset Management looked at the effect of hedging on investors in the US, Japan, the United Kingdom, Germany, Switzerland, Australia and Canada. They found hedging at least part of an equity portfolio’s foreign currency risk lowered volatility in the first five countries, but in Canada and Australia the strategy was counterproductive. “A currency hedge is not a diversifier within these two countries,” they wrote."

"Still not convinced? The Canada Pension Plan offers another commentary in its 2013 annual report. The CPP Investment Board sees “no compelling reason to hedge equity-related currency exposure,” largely because “hedging would unduly tie Fund returns to the price of oil and other commodities as they drive the foreign exchange value of the Canadian dollar.” (Incidentally, that explanation helps explain why hedging is equally dubious in Australia, where the dollar is also correlated with commodity prices.)"

http://canadiancouchpotato.com/2014/03/06/why-currency-hedging-doesnt-work-in-canada/

https://careers.jpmorganchase.com/cm/BlobServer/Currency_Hedging_.pdf?blobkey=id&blobwhere=1158630198939&blobheader=application/pdf&blobheadername1=Cache-Control&blobheadervalue1=private&blobcol=urldata&blobtable=MungoBlobs

 

Hi All, i have learnt a lot from reading the threads related to ETFs and LICs. Thanks everyone for sharing the insights and wisdoms.

Would love to hear your thoughts on my plan/strategy below to create passive income:

- 1/3 of our assets to be in super (asset allocation in Growth with 10 more years to go before retirement age)--in progress as planned.
- 1/3 in residential properties--in progress as planned.
- 1/3 in shares ( consisting of ETFs or LICs and small numbers of direct shares)-- starting

For the share portfolio: regular purchases in:
- 45% in either AFI/ARG/MLT when they are selling at a discount else VAS.
- 35% in VGS
- 10% in VAF and 10% in VAP OR 20% in either VAF or VAP

So far for the last few months I have been using the monthly spare cash to purchase VAS on days where I see the drops in the market, and on days like last Friday on the ASX I bought a bit more using the saving in the offset account. I have not bought any VGS yet as I feel that the US market was too high at the time.

My questions related to the share portfolio are:

1. Would you see my plan as sensible enough for someone who has not much knowledge in direct share investing, and does not get panic (any more) when the market drops, seeing it as a buying opportunity?
2. Is the asset allocation on the share portfolio sensible? Given we won't need the passive income for the next 7 - 10 years?
3. With the US market dropping by over 3% on Friday, which will most likely impact the ASX, if you were me:
a)would you buy more on Monday or wait for the next few days as it might drop further?
b) would you buy into VGS now or wait and see?
I am aware that there is a saying :time in the market not timing the market, however I prefer to drip feed into the market rather buying a larger sum all at once.

Thank you,

Anne

 

Not sure if your pro hedging or not after reading that Austing

 

• Australian tax booklet for International (US-domiciled) iShares ETFs
• Australian tax booklet for Australian tax booklet for Australian-domiciled iShares ETFs

 

Yes, I swear by vanguards. Havnt dissaponted yet.

 

Just to muddy the waters, by far my best performing ETF to date has been IXJ. ( Past performance is no indicator of future performance..etc etc)

https://www.blackrock.com/au/indivi...es-global-healthcare-etf-fact-sheet-en-au.pdf

A lot of the performance has been due to the AUD falling but I like being 'exposed' to healthcare stocks in an era of ageing demographics in developed and developing countries.

 

Good idea about the Helathcare exposure in an aging world that we live in.

One thing - does IXJ pay a dividend or is it a pure growth play?

 

About 1.5%. In USD and not able to DRP

 

I have read a couple of the Boglehead books and am wanting to invest in a similar manner.
The basic concept is a 3 fund portfolio.
1/3 US shares, 1/3 World shares and 1/3 Govt Bonds.

does anyone have a concept of the closest thing and Australian version of this would look like?

I will be going through Vanguard only for simplicity.

Australians may have other things to consider as well such as franking credits.

With this in mind I was thinking some mix of
1. Vanguard Australian Gov Bonds or fixed interest.
2. VAS of course as it covers most of our market
3. VGS of VGAD (not sure which one)..purely for diversification.
the wild card is.....
4. VHY which is attractive because of its dividends which will be our main source of income as we divest property.

VHY and VAS overlap to a degree so maybe both?

My prior thoughts were 1/3 each of VHY,VAS and VGS but I am conservative and think now that bonds or fixed interest should play a role.

My worry is the share market decline but I wonder about how far dividends will actually drop in relation to share prices.

I am an inexperienced share investor with only a few shares.

Sev

 

The Australian Vanguard website is very good and well worth spending some time on. Also easy to invest directly via B pay check your account etc.

 

@The Falcon,

Would appreciate your thoughts on SVW.ASX currently.

How would you view this as a long-term buy now, given the 10%ish grossed up yield?

As you know, I am trying to learn about efficient long-term investing and would appreciate your thoughts. I recall in Somersoft you had been a buyer several months back.

As a short-term trader, to me it looks utterly terrible, hence my interest in your longer-term perspective.

Regards
Greg

 

Yes- IXJ does have a dividend yield of 1.30%.
http://www.marketwatch.com/investing/Fund/IXJ?countrycode=AU

 

Yeah, investing in cyclicals is hard

Briefly ;

This business has a lot of moving parts and its pretty much in a perfect storm across its 3 main operating areas ; Iron ore (via Westrac), Media and LNG. Accordingly, performance is as you would expect with no real surprises.

If you are comfortable with counter cyclical investing then I think you could do a lot worse than SVW. One of the businesses key attractions for mine is the very large controlling stake held by the Stokes family (almost 70%). This holding is the vast majority of this families wealth. Ryan is running the show day to day and Kerry has oversight. Investing in a family controlled business like this does provide alignment with minority holder interests for the most part and avoids agency risk, but you also need to take a "family" view to wealth creation - they are investing for the long term, and as a holder you need to be as well. They will make moves that will be unpopular in the market, not feel the need to fully explain what they are doing etc. You need to be comfortable with this and let them run.

SVW is doing the right things at the moment, they are focussing on cost out and looking to pick up assets near bottom of cycle pricing (LNG). They are also doing a daily on market buy back which will shrink the free float substantially, so they will be quite happy with current share price for this reason. They have quite a bit of firepower in the form of a $1.1B ASX listed portfolio (Managed by Ryan) and about $900m in undrawn debt. My view is that dividend suspension risk is low given the controlling interest, but I think a cut from 40cps is quite possible. In the short term, I do not see any catalyst for SP movement, and think that it may be 2017 before any good news.

I'd be limiting to a max 5% portfolio position, and this is not a recommendation / advice etc

 

Great response @The Falcon - thanks for the insightful review. And don't worry, I always do my own due diligence before executing any investment.

One further question. In a recent interview, the venerable Thornhill mentioned that he used the 4 major LICs as his core holding, supplemented by about 50 individual stock holdings.

I reviewed the major LICs and note that their yields are substantially inferior to some of the higher quality individual stocks that they typically hold in their Top 10.

For example, the grossed up dividend yield ANZ.ASX is approximately 9%. The grossed up dividend yield ARG.ASX approximately 6%.

Am I right to infer that this is the "price" paid for the diversification that an LIC such as Argo provides, as opposed to the relatively greater risk associated with individual stock investments?

Your thoughts are appreciated.

Regards
Greg

 

@el caballo ; Sure. I guess the starting point is to remember the charter of ARG / AFI / MLT. These are conservative businesses who firstly focus on providing a growing income stream for shareholders, and long term capital growth. So, firstly, they are looking to protect their dividend in any conditions, and they do this by holding cash buffer to smooth dividend payments. Ie. they aren't paying out all the income (divis) they receive. An overlay of the traditional LICs dividend profile post GFC against STW/VAS will show this in action. (Bear in mind lots of the traditional LIC's holders are retirees, who need the income, so the big LICs take this obligation pretty seriously).

The second part is although they hold a lot of high yielding banks and TLS, they also have pretty long tail (ARG ex top 20 is 38% of portfolio) which has some growthy low yield stuff in the mix.

Thirdly I've taken this from Argo's Investment philosophy ;

In technical terms, Argo is a value investor with a bottom-up approach to investment analysis. However, put simply, we seek to identify the highest quality Australian companies and trusts through detailed analysis of each entity, and then over time, buy or add to those stocks when they are trading at prices which represent good long-term value. This patient and conservative approach has stood the test of time and provided our loyal shareholders with both long-term capital growth and dividend income since 1946.

In addition to rights issues (MLT has one at the moment) and dividend reinvestment plan, holding back some income provides a bit of a war chest for LICs to deliver on above when they see valuations being favourable, and I'd expect to see some positions added to this financial year.

 

@The Falcon

Brilliant .... thankyou sincerely!

 

Vanguard Aus to add new ETFs:

http://www.smsfadviseronline.com.au...SFAdviser_Bulletin11_09_2015&utm_medium=email

 

Couldn't see anything there Austing, but searched and found Vanguard had plans to launch four ETFs in the fourth quarter of the year, pending approval from the ASX. These comprised an international fixed interest index (hedged) index ETF, an international credit securities index (hedged) ETF, a FTSE Europe shares ETF and a FTSE Asia ex Japan shares index ETF.

 

Sorry link works at my end but may be user specific. But yes those are the new funds the link referred to.

 

From Vanguard

Just as life has two certainties, the same is true for investing.

1. First, future investment performance is impossible to predict.
2. Second, markets will go up and markets will go down.