My Failing Debt recycling strategy using..... HVST

ease up turbo, you misunderstood. nothing to do with differing opinions. im all for opinions etc, respect what you have done etc etc...but my comments were directed at people who clearly have (or 'had' now i hope) no idea of how the product (HVST) is meant to work.

 

Plato's PL8 only for those in pension phase?

 

Any low tax environment given very high turnover and hence resultant CGT.

From Plato:

Still potentially ok for Super Accumulation stage but ideally when in Pension mode.

 

Had HVST for a while but sold it all recently taking comfort that I can write the losses off against gains made while slowly switching to old school LIC's. Will now avoid these types investments(??) including PL8, like the plague.

 

since it listed

 

I haven't given up on this one yet. Been buying up small parcels every now and then at the cheaper entry price - mainly for the juicy dividends.

 

Can you answer this tho.

it has a yield higher than the shares it holds. How does it do this?

 

Do the dividends make up for the ongoing loss of capital value?

 

Wow...

Dividends are the same thing as selling down shares.

You're not getting juicy dividends. You're being given your capital back in dividend form. You put money in, they give it back to you and then you pay tax on it. HVST is a ****ing rip off.

Sell all your HVST shares and move to VAS.

 

Hmm, this thread is about 2 1/2 years old and the OP still holds. A number have provided their viewpoints around then so I'm guessing the OP is well aware of them and doesn't need to be "told" again.

I blame @Redwing for posting the bloody graph.

 

I clipped and kept this years ago from Seth Klarman's Margin of Safety book.

First time the penny dropped for me. It was an important piece of the jigsaw on my journey.

 

Some interesting comments in this link

The Problem with HVST (Betashares Australian Dividend Harvester Fund)

Especially

In defence of HVST, HVST serves only one powerful purpose, which is to increase your borrowing power with the banks through the deception of higher income. Benefits a cash rich, income poor property investor. An equilibrium can be reached maximising the investor’s leverage power…..the outcome..lots of $$$, overcoming HVST shortcomings.

Beyond that, speaking of overall return over a long term, HVST is unlikely or nearly impossible to beat etfs such as VAS due to VAS low fees. Also, I don’t advocate any form of dividend focus mindset even if you are retired, which entails poorer overall returns (partly if you do not DRP, time in market generates greater return), lack of diversification etc. It is a flawed concept except to help you sleep better at night. You might as well have 25% in a lump sum annuity plan that is very effective in a 30/40 year survival possibility. Also your funds should have been in Super self allocation between Aus and International shares with approx 0.08% fees in First State Super.

For a non retiree, a dividend ETF is just pointless exposing you to high taxes. Better off with VAS, at least the capital gain component is larger and when sold, falls within tax free threshold.

VAS alone is already substantial in grossed up dividends, renders VHY pointless as well. As a retiree in early years, your equity position should be low and following a rising glide path. Rebalancing is easy due to substantial cash holdings. VAS mixes well with VGS+VAE/VGS, giving you a simple portfolio. Either you choose bucket strategy in your retirement, or rising glide path rendering dividend income pointless as the equity component is designed for your later half of retirement.

Even if you choose 90% equity asset allocation. Just having a VAS/VGS or VGAD combo allows you to rebalance once a year along with your withdrawal rate. As David has been reiterating: Return=capital appreciation + dividends.

 

No it doesn't. However I am holding onto this for two reasons currently:

1) HVST dividend is allowing me to pay my equity loan interest, with some cash left over to dip back and buy more at a cheaper entry price.
2) In future I can sell HVST at a capital loss and offset that against the CGT I may derive from selling some of my VHY & VAS units.

In hindsight was buying into HVST a bad decision? most definitly. But I am trying to make the most of the bad situation I am in.

 

You could buy vas, and sell some to pay for the loan. This is just happening inside hvst.

You want to create a capital loss? Just sell your vas at below market price then.

whats past is past. What i dont get is why you would buy more when the new units have the same problem.

 

Or you can invest in something that will both pay you income and grow over time... like a proper investment would?

Definition of insanity is...?

 

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If you are in a hole probably best to stop digging.

Scenario below is investing 100K into HVST on inception date of 3/11/14 vs investing same 100K into VAS on the same day.



Couple of things to note.

I’ve assumed a marginal tax rate of 37% + 2% Medicare. No idea what tax rate you are on.

I’ve also assumed a 50% discount rate for capital gains; If you have short term capital gains to offset then the tax shield would be double, but regardless the government sharing in your capital losses is not going to make your investment in HVST whole again.

There might be an initial reaction that the marginal income rate should not apply to the investment income due to the income being offset by interest expenses – but don’t forget that interest expense could have lowered tax on other earned income.

Bottom line is already grim and the design of the ETF means things will only continue to get grimmer with time.

The "current" yield that attracted you is a function of capital and as HVST capital component continues to fall so will the absolute income payment.

This is HVST income distribution trend.


This is VAS income distribution trend


The other feature of HVST that costs money is the insurance they take out in the form of short future contracts.

If ever this insurance was to pay for itself it is during a historically fast decline like we have just had. And it did work, but over the long run you pay (like all insurances that are not used) for that volatility reduction.

This is a comparison of HVST vs VAS since market peak on 20/2. Insurance paid off and decreased volatility, but short futures have since been a drag. (minimal dividend harvesting during period)


When HVST is not skimming dividend its just an expensive exposure to A200.

Here is the current holdings for MAY.

 

Debt recycling if done prudently is a very boring strategy that may not even be worth the trouble when considering the behavioral aspects and unknowable outcomes.

Naturally the temptation is to find products that seem like a no brainer like this one, producing income yield much higher than interest rate. As we can see products like this and VHY are a debacle. The whole debt recycling strategy and the potholes on that road are a worry...most should leave their equity in the garage.

 

Great post @dunno

 

VAS and HVST are pretty much the same type of companies. But compounding is amazing, it works both ways, putting a little more in , v, taking a big chunk out gives a very different result especially after tax. If you had put 120k in NDQ 5 years ago you would have your 300k now. If you like paying tax and wanted 9% dividends you could have put 200k in HACK 3 years ago had your 300k plus your dividends, The difference with HACK is it pays its dividends from growth ( liquidating future earning potential). Where to reduce risk and volatility when a share price passes a mandated weighting it is sold down, some goes to pay dividend and some goes to acquire small weighting for the next growth stock.