Passive income ETFs - alternative to HYP

[dspp]

Mmmmmm ........

Mine below are more of a general comment, not to be taken to the nth decimal place or comma, and with general common sense. The general point is that if one is concerned about (say) household energy bills going up by more than general inflation then a fairly sensible way to deal with that is to hold a (dis)proportionate amount in that sector. So hold (say) SSE + NG. Then if there is excessive price inflation in that sector then there is a tad better than average chance that there will be above average dividend increase in that sector. I'm not saying it is perfect, all I am saying is that it is a way of thinking about overall asset allocation in setting aside the basics of a retirement portfolio. When I sit and look at my 30-35 share HYP it is not entirely coincidence that it roughly matches up to a general household's spend areas because we are all parts of the bigger economy.

Is it the only way to think, hell no. The latest post by inv3t is absolutely excellent by the way and it is roughly what I am building as a portfolio outside my HYP portfolio. Hariseldon also posts similar excellent suggestions in this area. My personal basket at present in that is VUKE, VERX, VAPX, VWRL for what its worth.

For mc2: the RDSB business model is overweight gas, which means that it goes as feed into petrochem, fertiliser, and gas powered generation, as well as of course diesel into distribution & ag. So it is a wider play and one I wouldn't necessarily back off of even if I bought an electric car - and by then I expect Shell will have gone further into wind (though they do have a habit of timing the macro sectoral diversification bit badly every decade or so, diworsification I think Dod calls it, think their nukes, coal, forestry, shale as being four over the last six decades - and something anyone on the O&G board knows I try to think carefully about).

regards, and best wishes all, dspp

[mc2fool]

For mc2: the RDSB business model is overweight gas, which means that it goes as feed into petrochem, fertiliser, and gas powered generation, as well as of course diesel into distribution & ag. So it is a wider play and one I wouldn't necessarily back off of even if I bought an electric car

Well I agree it's a wider play, but it was you that raised it as a specific match for your oil/gas bills. Indeed, the list of uses you give raises further issues with "matching" investments to spending areas.

E.g. we all eat so we should all invest in Tesco/Sainsburys/Morrisons/etc, fine. But wait, fertiliser is used to grow food and diesel is used to get it to our local supermarket, so should we be buying RDSB to (at least in part) "hedge" our food bills?

And there is, as I said, the matter of (dis)proportionality. The income from my investments (HYP + a hodgepodge of ETFs, ITs & OEICs) more or less covers my basic spending needs, but if I were to try and rebalance it to match my specific spending areas I'd have some 25% of it in supermarkets/food and would have to slash my insurance holdings to less than 1%.

[hiriskpaul]

Then if there is excessive price inflation in that sector then there is a tad better than average chance that there will be above average dividend increase in that sector.

I don't see why there should be, or even if there was why your 2 share picks would be representative of dividend increases.

Would it have made sense for a UK mortgage holder to invest in UK banks in 2006? In theory as interest rates rise banks make higher profits, so by your arguments banking shares should be a hedge for mortgage payments. The reality was such that the UK banking sector profits evaporated and the sector required a large injection of new capital in order to stay solvent. That large injection diluted existing shareholders. Something similar could happen in the utilities sector or with your particular stock picks, so even if the utility companies survived and continued to pay, the income from your investment could drop.

I was going to mention supermarkets as well, but mc2fool beat me to it. Another example of a very imperfect hedge.

There is no company or sector that cannot become insolvent.

[Plutus]

.... The latest post by inv3t is absolutely excellent by the way and it is roughly what I am building as a portfolio outside my HYP portfolio. Hariseldon also posts similar excellent suggestions in this area. My personal basket at present in that is VUKE, VERX, VAPX, VWRL for what its worth.

...

Concurred, thank you 1nv35t that was a good read and something that I could setup easily enough.

[hiriskpaul]

I'd second the diverse index tracking investment and taking income from capital gains and dividends as required.

VAPX Asia/Pac
VERX Europe exc. UK
VFEM Emerging Markets
VJPN Japan
VMID UK Mid cap
VNRT North America

Half weights to VMID, VNRT and VJPN (full weights to the other three) has
...

Have you checked the weighting at company level or sector?

I think you just made Samsung the biggest investment at 1.56% of the total compared with the World Tracker ranking of Apple at 1.63%. Unless I have done the sums wrong, I think you would be putting more into Samsung than the total going into Apple, Microsoft, Alphabet (Google), Amazon, Facebook, Intel, IBM, CISCO and Oracle. Hard to see the justification in that. Some of the FTSE 250 companies must have been catapulted high up the ranking as well.

It is hard to shuffle these regional cap weighted ETFs around without creating distortions elsewhere. When I did it a few years ago the best I came up with was to cap the US at 40% and increase the others above cap weighting, then add some small cap funds. I doubt it has done me any good though and definitely not last year.

[Plutus]

The broker that I use (Selftrade/Equiniti) does not provide all of the Vanguard ETFs via their regular investment service (£1.50/month), so is the best alternative to find the least expensive accumulating OEIC funds?

I could only buy VMID and VJPN via the regular investment although I have requested that others are added.

Blackrock appear to provide emerging markets and Pacific ex-Japan accumulation funds that are less expensive than the Vanguard ETFs but I haven't checked any others.

I would have to pay a 0.3% annual fee on all fund holdings but it'd take a while for me to invest a meaningful amount if I invest about £200/month initially.

Obviously I would need to calculate the total costs for each option but I won't be purchasing in amounts large enough to justify the £10-12 commission unless I use regular monthly investments.

[Lootman]

The broker that I use (Selftrade/Equiniti) does not provide all of the Vanguard ETFs via their regular investment service (£1.50/month), so is the best alternative to find the least expensive accumulating OEIC funds?

Obviously I would need to calculate the total costs for each option but I won't be purchasing in amounts large enough to justify the £10-12 commission unless I use regular monthly investments.

How many ETFs in total do you want to invest in? Let's say it's six.

Given the fact that most of the ETFs you want are not available via the regular monthly savings deal, and given that a 0.3% fee for holding open-ended funds is very irritating, then you might instead consider this approach:

Allow dividends to accrue and, when they have reached a reasonable amount (i.e. justifies the regular £10-£12 commission), then make an investment in one of the six ETFS you like. Maybe the one that is the most under-weight relative to your neutral benchmark.

Also (and sorry if I missed this because I haven't read the entire thread) is this all in a taxable account? Monthly/regular savings and the automatic reinvestment of dividends can be a pig when it comes to maintaining tax records, although accumulation units can be an even bigger pig.

[Plutus]

How many ETFs in total do you want to invest in? Let's say it's six.

Given the fact that most of the ETFs you want are not available via the regular monthly savings deal, and given that a 0.3% fee for holding open-ended funds is very irritating, then you might instead consider this approach:

Allow dividends to accrue and, when they have reached a reasonable amount (i.e. justifies the regular £10-£12 commission), then make an investment in one of the six ETFS you like. Maybe the one that is the most under-weight relative to your neutral benchmark.

Also (and sorry if I missed this because I haven't read the entire thread) is this all in a taxable account? Monthly/regular savings and the automatic reinvestment of dividends can be a pig when it comes to maintaining tax records, although accumulation units can be an even bigger pig.

It's a shares ISA so there shouldn't be any issues with taxation.

My overall investment portfolio is overweight in the USA as I have a frozen abbey life pension from about 17 years ago that's invested in a USA accumulation fund that hasn't done so badly over the past few years. It isn't worth transferring anywhere even if I could so I'm leaving it to run its course even though I was considering blanking out that it ever happened. I only contributed for 2 years until I switched back to the local government pension.

I am overall underweight in small companies and emerging markets so I could aim new cash towards those markets.

I could make fewer purchases at £10 per trade but I was hoping to keep fees below 1%.

Another idea would be to build up an amount via the funds then sell them to switch to etfs which should be cheaper in the long run. I'll speak with selftrade tomorrow to ask about adding the vanguard etfs to the regular investment service.

[hiriskpaul]

I think you just made Samsung the biggest investment at 1.56% of the total compared with the World Tracker ranking of Apple at 1.63%. Unless I have done the sums wrong, I think you would be putting more into Samsung than the total going into Apple, Microsoft, Alphabet (Google), Amazon, Facebook, Intel, IBM, CISCO and Oracle. Hard to see the justification in that. Some of the FTSE 250 companies must have been catapulted high up the ranking as well.

Anything less than around 2% in any one stock acceptable IMO. Samsung at 1.7% (7.8% weighting in its index divided by 4.5 spread of indexes (3 fully weighted, 3 half weighted = 4.5 total)) is the outlier, the next largest tending to be 1% or less (4.5% weighting in its own index). A portfolio value can fluctuate more than that in a single day, such that even if the biggest stock was totally wiped out it might be considered as just mostly irrelevant 'noise'.

Looked at as entities whose market prices fluctuate over time and the names (and cap size) behind those fluctuations is largely irrelevant. Any one stock has just as much chance of rising/falling say 10% as any other. Broad diversification will capture the tendency for max downside -100%, max upside unlimited, -50% down requires a 100% gain to get back to break-even ... type characteristics (left-tail losers tending to be outweighed by right-tail gainers, with most stocks relatively lagging the broad 'index' average).

This is absolutely not true. Stocks show a wide range of volatilities. Some are much more likely to rise or fall by 10% than others. Also certain markets are much more volatile than others, in particular emerging markets and developed asia/pacific, which you have significantly overweighted compared with a global index. I have not calculated it, but I would expect that the volatility of this portfolio is likely to be much higher than that of the global index. Not that I am against anyone taking on more risk if that is what they want to do and the extra portfolio risk from EM and Asia Pacific certainly could deliver higher returns.

A curious omission is a FTSE 100 ETF. Why? For UK investors the FTSE 100 is the cheapest market to invest in after the US, with iShares ISF costing only 0.07% per year and that is before any gains from stock lending. In addition the dividends are paid without any deduction of withholding taxes and in GBP, so no FX fees are applied by brokers. OK, recent performance has been lousy, but that is mainly a result of firstly being overweight financials, then being overweight oil companies and miners. That recent poor performance is not indicative of future performance. It seems strange not to want to include FTSE 100 companies in a global portfolio whilst including say French stocks or Korean. If is is down to the additional complexity, one suggestion would be to use the Vanguard ETF that includes UK companies (VEUR) instead of VERX, although that is a more expensive way to invest in UK large cap equities than simply adding ISF.

[GeoffF100]

The broker that I use (Selftrade/Equiniti) does not provide all of the Vanguard ETFs via their regular investment service (£1.50/month), so is the best alternative to find the least expensive accumulating OEIC funds?

I could only buy VMID and VJPN via the regular investment although I have requested that others are added.

Blackrock appear to provide emerging markets and Pacific ex-Japan accumulation funds that are less expensive than the Vanguard ETFs but I haven't checked any others.

I would have to pay a 0.3% annual fee on all fund holdings but it'd take a while for me to invest a meaningful amount if I invest about £200/month initially.

Obviously I would need to calculate the total costs for each option but I won't be purchasing in amounts large enough to justify the £10-12 commission unless I use regular monthly investments.

If you are investing the relatively small amount of £200 per month, you will significantly reduce costs by keeping it simple. Investing in just one fund - a world tracker - will reduce your costs. Investing quarterly will also reduce costs. You could use a cheaper broker, e.g. iWeb. Alternatively, you could use a broker that does not charge transaction fees on OEIC purchases and sales to make small purchases, to build up to bigger purchases using ETFs or iWeb.

[Plutus]

If you are investing the relatively small amount of £200 per month, you will significantly reduce costs by keeping it simple. Investing in just one fund - a world tracker - will reduce your costs. Investing quarterly will also reduce costs. You could use a cheaper broker, e.g. iWeb. Alternatively, you could use a broker that does not charge transaction fees on OEIC purchases and sales to make small purchases, to build up to bigger purchases using ETFs or iWeb.

Hello, yes after much coming and going and considering different options it still seems more simple to invest in one global tracker for as long as possible without any interference on my part. Thanks for the reply, everyone has been very helpful and I've enjoyed reading the different views and ideas.

[TimR]

I'd second the diverse index tracking investment and taking income from capital gains and dividends as required.

VAPX Asia/Pac
VERX Europe exc. UK
VFEM Emerging Markets
VJPN Japan
VMID UK Mid cap
VNRT North America

Half weights to VMID, VNRT and VJPN (full weights to the other three) has

Expense Ratio 0.175% to hold 3215 stocks across sector weightings .

I assume this Global Equity ETF portfolio is more suitable for a younger investor.

Do you use any passive fixed income other types of investment to hedge to volatility of this ETF portfolio which may be suitable for middle aged pre-retirement investors or investors near retirement?


Tim R

[Plutus]

...
How many ETFs in total do you want to invest in? Let's say it's six.

Given the fact that most of the ETFs you want are not available via the regular monthly savings deal, and given that a 0.3% fee for holding open-ended funds is very irritating, then you might instead consider this approach:

Allow dividends to accrue and, when they have reached a reasonable amount (i.e. justifies the regular £10-£12 commission), then make an investment in one of the six ETFS you like. Maybe the one that is the most under-weight relative to your neutral benchmark.

Also (and sorry if I missed this because I haven't read the entire thread) is this all in a taxable account? Monthly/regular savings and the automatic reinvestment of dividends can be a pig when it comes to maintaining tax records, although accumulation units can be an even bigger pig.

Selftrade have added the ETFs below to the regular investment service:

Vanguard FTSE Developed Europe ex-UK (VERX). ISIN: IE00BKX55S42
Vanguard FTSE Developed Asia Pacific ex-Japan (VAPX). ISIN:IE00B9F5YL18

Vanguard FTSE Emerging Markets ETF (VFEM). ISIN:IE00B3VVMM84
Vanguard Global Value Factor ETF (VVAL). ISIN:IE00BYYR0B57

VJPN and VMID were already available. I am now free to construct my own weird and wonderful geographic ETF portfolio if I really fancy doing so!

[kempiejon]

I assume this Global Equity ETF portfolio is more suitable for a younger investor.

Do you use any passive fixed income other types of investment to hedge to volatility of this ETF portfolio which may be suitable for middle aged pre-retirement investors or investors near retirement?

Tim R

TimR - So why wouldn't a middle aged investor use such a blend of markets? Or perhaps a better question is how much fixed interest would you suggest to hedge the volatility for both a pre retirement and near retirement investor?

[kempiejon]

Selftrade have added the ETFs below to the regular investment service:

Vanguard FTSE Developed Europe ex-UK (VERX). ISIN: IE00BKX55S42
Vanguard FTSE Developed Asia Pacific ex-Japan (VAPX). ISIN:IE00B9F5YL18

Vanguard FTSE Emerging Markets ETF (VFEM). ISIN:IE00B3VVMM84
Vanguard Global Value Factor ETF (VVAL). ISIN:IE00BYYR0B57

VJPN and VMID were already available. I am now free to construct my own weird and wonderful geographic ETF portfolio if I really fancy doing so!

my preferred SIPP provider Hargreaves Lansdowne say

Eligible ETFs
The following list of ETFs are available for regular savings as at 26 July 2016. The list of available ETFs may be subject to change.
Vanguard FTSE Developed Europe ex-UK
iShares Core MSCI Emerging Markets IMI UCITS ETF
iShares Core UK Gilts UCITS ETF
iShares Core MSCI World UCITS ETF
iShares FTSE 100 UCITS ETF
iShares FTSE 250 UCITS ETF
iShares FTSE MIB UCITS ETF
iShares MSCI Japan UCITS ETF
Shares UK Dividend UCITS ETF
iShares S&P 500 UCITS ETF offer these on regular investment.

[colin]

I came to the belief that an overdue focus on income producing assets in my portfolio would be a distraction from the the necessity to make sure my savings are diversified. Don't forget that if and when market interest rates rise then the income from passive bond funds will rise too, how fast depends on the average age to maturity.
One approach could be to feed a portion of returns from cap weighted trackers into an investment grade bond fund.
£???

[ModernMicawber]

I came to the belief that an overdue focus on income producing assets in my portfolio would be a distraction from the the necessity to make sure my savings are diversified. Don't forget that if and when market interest rates rise then the income from passive bond funds will rise too, how fast depends on the average age to maturity.
One approach could be to feed a portion of returns from cap weighted trackers into an investment grade bond fund.
£???

I "sort of" do this. In the SIPP, I don't care about income and almost everything is cap-weighted - in fact more than half is in VWRL.

In the ISA, I indulge myself in the fantasy that this will one day be my "early retirement" income, so it is split 75-15-10 to "global equity income", bonds (VGOV), and "diversifiers" - currently Funding Circle Income fund, but will top up with "another other", probably a property fund of some description, when this gets to a suitably low percentage of the total.

In both cases, I don't do much "active" rebalancing, but divert all income received to the most underweight asset class, normally once or twice a year. I have a rule about rebalancing sales, which is that the round-trip cost of the trade(s) needs to be less than 1% of the total consideration; this was more meaningful before when the balances were lower but it still means I don't worry about rebalancing tiny percentages.

The equities in the ISA are currently split unevenly between VHYL, and the SPDR Global Aristocrats ETF. I am however thinking of ditching VGOV in favour of the Vanguard Global Bond Index which was brought to my attention by hiriskpaul on another thread.

I wouldn't normally be contemplating such radical changes, but I am currently in the process of switching the ISA from Youinvest to iWeb, so there is an "opportunity" to make some no-cost changes by selling holdings and transferring in cash, thus avoiding the £25 per-line exit fee.