ETF Exchange Traded Funds (ETFs) 2020

I guessed that with the hedging it would make it more complex to keep paying distributions. So it's in effect reinvested. The income it would receives from dividends far outweighs it's MER.

 

Thanks @Pleep.

Never looked at these hedging products. Not an area which greatly interests me.

 

VGAD standard distribution timetable is every 6 months.

When the A$ is falling the distributions are likely to be nil to very small.
When the A$ is rising the distributions are likely to be large.

The reason arises from the hedging.

Trusts have to distribute all income and realised capital gains each period.

On the capital front, ETF’s are very capital gains efficient because of how they are structured around creation units and baskets. This is a good thing as it means there is often no capital gains to distribute even following changes to the index.

Hedging itself is likely done by a rolling 3 month FX forward contracts or similar. The gains or loses from these contracts are treated as income whilst the effect on the assets they hedge are unrealised capital events.

So when the dollar falls, the fund experiences unrealised gains on assets from the currency change and realised income losses making the hedge effective. The income loses from the hedge has to be bought to account each period and it offsets against actual dividend income often resulting in a negative income situation and hence no distribution.

Everything reverses when the A$ rises and you will get large distributions as currency hedge gains accounted for as income add to the distributions received by the fund.

There is a mechanism called TOFA used by some hedged vehicles to match the income effects with the capital effects over the short run and smooth the distributions but Vangaurd doesn’t use it.

If you hold a hedged vehicle in a flat tax rate environment (ie super or company structure) its swings and round about's. If you hold in a progressive tax environment where you can be pushed into higher or lower tax brackets because of the fluctuating distribution, then maybe look for funds using TOFA if you want hedged exposure.

 

Brilliant. I had many a multi-page Google looking for answers but you have answered it all.
Thanks @dunno that's very much appreciated. Although I don't care for the distributions or not. Income ambivalent

 

Thanks so much,@dunno. I understand now. I have recently switched to buying VGAD due to the low AUD. How much should be invested to make the discretionary trust worthwhile if the couple are in the same income tax bracket? This is mainly for the future to stream distributions to kids if possible.

 

I can't comment on your personal situation. Maybe @Terry_w or his tips could assist you.

Your welcome and I say Kudos to Moderators for returning the ETF thread to a sanctuary for sensible discussion, so that questions like @Mcube are not lost in the noise.

 

There is going to be unsubstantiated claims about active management, opinions based on beliefs not facts, there will even be outlandish claims with no ties to reality peddled by ego driven fraudsters. Sadly it seems all is fair game in our fake news culture.

There will also be the occasional active fund and or approaches that can outperform on an ongoing basis. They will have some form of skill or judgement to see and hold what will turn out in hindsight to be under-priced risk.

How you pick the person before the judgement is proven is the hard bit. Even if the person you are backing is yourself its all most impossible to know prior if you have got it or not. Even after success its hard to know if it was luck or skill, you simply do not have enough evidence from one investing lifetime to completely eradicate that outcomes were mainly about luck.

So, with the above in mind let’s look at some detail to aid consideration of alternatives to passive ETF’s

The math for active management by William Sharpe (creator of the sharpe ratio) is here.
active


And here is a diagram that I can hopefully use to explain a bit further.


Under the bell curve represents the outcomes of all active investing.

The black line in the middle is the average.

The red line is the passive return in comparison.

The distance between the two is the expenses of active investing. (see sharpe’s math for substantiation)

Anything under the bell curve right of the red line is active outperformance in any given year, it varies with size of fund(weight of money) which outperform and movement between asset classes (% cash holdings etc) but ~40ish % each year across all asset classes is ball park.

Now the little blue line comes into play from binomial probability which tells you if something is random and has a 40% chance in any one year what is the likelihood just on chance it will be positive over ten consecutive years. Right of that line lives both the lucky monkey throwing darts and the truly skilled operator. You can expect the lucky monkey’s luck to run out one day and return to average the truly skilled will continue winning unless size (think Buffett) brings them back to earth. The few skilled ones right of the line will be very valuable to you IF you pick them in advance.

If you don't have any skill in picking the correct active strategy/manager you have as much chance of finishing up to the left of the black line as the right, and your probability of being on the right side of the red line is a lot less than even, that is the risk if you play the game without any real skill. Passive will always return the red line.

 

@dunno I have to say how wonderful it is to have you here. Your posts are extraordinary and a joy to read. Importantly what you post you support with data. Thanks to your posts I’ve been able to peel away those final layers that have been preventing me from being the best I can be as an investor. So a huge thank you.

 

Why $50? That’s well below the previous bottom, what are you basing the goal on?

 

I am a firm believer of the index - the maths don't lie. However, for arguments sake, there are indeed skilled/knowledgable operators who stay above the blue line consistently - are you not proof (although it may be easier for an individual with more agility and less constraints than a fund manager with large FUM, I don't know)? This is one reason I have satellite active holdings - they are not correlated with index returns and provide a value tilt, which has been dormant but has historically outperformed.

Do you have any "no advice" thoughts about MFF, which has consistently outperformed? The other is PMC, which has performed poorly for a long time, but whose NTA has not fallen as much compared to its compatriots in recent falls.

As with many others, I enjoy your posts for their objectivity and key educational messages.

 

I'll link at the bottom to a video that explains the justification for active as far as I'm concerned.

My result is just one possible outcome - statistically insignificant, it could be skill, it could be luck. I can't even honestly tell which it is.

In my direct portfolio I am currently interested in PTM (the management company for PMC) not currently interested in MFG (management company for MFF) But my guesses are worse than "no advice", especially if you put any weight in what I currently think, because I could change my mind tomorrow and how would you know? I also protect myself from myself with diversification, position size limits and core allocations towards passive investments.

I'm not going to argue for or against Core and Satellite. It suits many. It suits me. It still fits within a robust approach to investing but the core is the important thing, the satellites are farting around the edges for a bit of personalisation.

 

Its American, but I thought this was a good listen. Recommend it for those filling in stay at home time.

https://hwcdn.libsyn.com/p/b/2/3/b2...86755943&hwt=6678145af5dac083a83baa9c86c27beb

 

Downloaded that one onto my tablet and have listened to it a couple of times recently

 

This is what is becoming clearer to me. With age and the desire for simplicity perhaps it’s not worth the bother!

 

May be one day I might get you to be like me with just two holdings may be three. VAS, IVV and AUI. Whenever have spare funds just rebalance between the three. Most of the time it's between VAS and IVV though.

Cheers
Oracle

 

Getting there slowly but surely with VAS, VGS and ARG (prefer it to AUI given hugely better liquidity) being the desired destination. Combination of ARG / VAS has also proven useful for tax loss harvesting and of course potential income smoothing. The ugly duckling PMC is likely to stay albeit high fee and unlikely to outperform the index as my wife likes it as a Global “income” holding. Investing for both of us so one needs to respect their partners wishes as well. Not quite the ideal but still a simple portfolio of four holdings.

 

Lack of liquidity may be a buy impediment but for selling it could be a blessing.

As to preference I prefer AFI, ALI, ARG, AUI, DUI, MLT, MIR, PMC, WHF.

Back at ya @Redwing for slipping ETF stuff into the LIC thread.

 

Sneaky LIC investors

 

Being a disruptor is the in thing, isn't it? You have a problem with that?

 

I set that a long time ago when it looked like the market was crashing. Anything under $70 looks good now but I would like to pick up a parcel for a price under $60.

The more units I can aquire the better in terms of being able to retire sooner but I can see I was overly optomistic with my $50 target!