New Lazy ETF Portfolio

[nathan]

Hi all,

I'm a fan of Lazy ETF portfolios, and have a couple delivering 10-12% XIRR over 15 years now. I'm just building a new one and the availability / ongoing charges have changed a bit, so I'd welcome comment on the following. The objective is inflation + 4% (say 7% annual growth) over a 10+ year horizon for a UK investor with quarterly dividends reinvested to rebalance periodically.

Description                   | ETF  | Target | TER   | Yield
FTSE100 UK Shares             | ISF  |    15% | 0.07% | 3.30%
FTSE250 UK Shares             | VMID |    10% | 0.10% | 2.02%
World Shares (Developed)      | VEVE |    50% | 0.12% | 1.45%
Emerging Markets World Shares | VFEM |    15% | 0.22% | 1.90%
Corp Bonds                    | SLXX |    10% | 0.20% | 2.10%
Total                         |      |   100% | 0.13% | 1.92%

Reasons as follows:
ISF is cheaper than VUKE
VEVE is VWRL minus Emerging Markets - I've been using VWRL for years but it has 0.22% TER and I have VFEM anyway
SLXX just because I don't like Gilts
Some nuisance with witholding taxes on the dollar denominated VEVE/VWRL and VFEM above, but I've lived with that for years (this isn't a tax-sheilded account).

All comments welcome and helpful.

Nathan

[Hypster]

Hi Nathan,

Does VEVE already include FTSE 350 coverage? I'm not sure why you'd need two FTSE ETFs on top of a global tracker, unless you're looking to overweight UK somewhat.

[nathan]

Hi Nathan,

Does VEVE already include FTSE 350 coverage? I'm not sure why you'd need two FTSE ETFs on top of a global tracker, unless you're looking to overweight UK somewhat.

Yes that is deliberate - I'm trying to find my Tim Hale "Smarter Investing" from which my version of a Lazy ETF is culled (whoever borrowed it clearly found it too useful to return). The passive portfolio in that book doesn't have specific ETFs but the general allocation at my desired risk level (7/7 I think) was:

UK 25% (50% large caps, 50% small caps)
World 50%
Emerging Markets 15%
Fixed Interest 10% (he recommends Gilts not Bonds)

Nathan

[TedSwippet]

Description                   | ETF  | Target | TER   | Yield
FTSE100 UK Shares             | ISF  |    15% | 0.07% | 3.30%
FTSE250 UK Shares             | VMID |    10% | 0.10% | 2.02%
World Shares (Developed)      | VEVE |    50% | 0.12% | 1.45%
Emerging Markets World Shares | VFEM |    15% | 0.22% | 1.90%
Corp Bonds                    | SLXX |    10% | 0.20% | 2.10%
Total                         |      |   100% | 0.13% | 1.92%

As already mentioned, VEVE contains UK stocks, around 4.5% or so, so this arguably puts you a bit overweight on your target UK holdings. Not heinous, but nevertheless a side-effect of combining all-world and specific country or region funds. Cutting back slightly on ISF and VMID and bumping up VEVE to compensate would solve that.

Some nuisance with witholding taxes on the dollar denominated VEVE/VWRL and VFEM above, but I've lived with that for years (this isn't a tax-sheilded account).

Not sure what you mean by withholding tax nuisance. Or, to put it differently, you would get this same level of 'nuisance' with any fund or ETF you choose, because the withholding tax applies at the fund level.

Are you thinking here of forex nuisance, where some USD denominated Vanguard ETFs pay out dividends in USD, which you then have to convert to GBP before withdrawing or reinvesting? If that, then yes, some of this might be avoidable by using funds or ETFs that pay dividends in GBP, but that might of course incur higher TERs that could exceed the forex drag on dividends.

I take it you're using ETFs exclusively so to avoid high platform fees for funds and OEICs (HL, Youinvest)?

[nathan]

Thanks for the input.

I've changed this to ISF 12%, VUKE 10%, VEVE 53%, VFEM 15%, SLXX 10%.

The withholding tax issue is puzzling me. I had read that the dollar denominated funds (VWRL, VEVE, VFEM) were subject to 15-30% withholding tax. But I've looked at the statements on my dealing account and none has been set aside.

Regarding ETFs versus index funds, I like ETFs, partly because I know what I'm buying and selling them for (even though I tend to hold forever, or at least 10-15 years so far), and partly because I only pay £3.50/month for my Dealing account and ISA account with AJ Bell Youinvest, and £10/month for the SIPP. All this rather than the 0.25%/year they would charge on funds. So it's partly fees, partly a style thing. Annoyingly, the UK Vanguard ETF universe is quite limited - I would like a world smallcap index for example, and it would be good for them to meet Balckrock iShares on FTSE100 fees, but I've been very content with the offering otherwise.

[TedSwippet]

The withholding tax issue is puzzling me. I had read that the dollar denominated funds (VWRL, VEVE, VFEM) were subject to 15-30% withholding tax. But I've looked at the statements on my dealing account and none has been set aside.

I think you might be confusing fund denomination currency with fund domicile. You would pay 15% US/UK treaty rate (with a W-8BEN) in US tax withholding on all dividends paid out by US domiciled funds and ETFs(*). Non-US domiciled ETFs don't suffer this (Vanguard's are all domiciled in Ireland), and their denomination currency is broadly irrelevant to you; it's just a measuring yardstick. Although, it is also an annoyance if the ETF pays out dividends in a currency that is not your own.

You don't get a free pass on US tax with Ireland domiciled ETFs, though. For these ETFs, the ETF itself internally pays the US 15% US/Ireland treaty rate on dividends it receives from US stocks. You can find this accounted for in the ETF's annual report.

(*) Not that you can realistically buy US domiciled funds and ETFs any more. Research PRIIPs for why.

[nathan]

Ah thank you.

And there’s still the 0.5% currency charge plus FX spread on conversion of USD dividends to GBP.

[scrumpyjack]

Ah thank you.

And there’s still the 0.5% currency charge plus FX spread on conversion of USD dividends to GBP.

Unless your broker allows you to have a USD account. Some do but others, like HL, don't.

[Hariseldon58]

Thanks for the input.

I've changed this to ISF 12%, VUKE 10%, VEVE 53%, VFEM 15%, SLXX 10%.



I would like a world smallcap index for example, and it would be good for them to meet Balckrock iShares on FTSE100 fees, but I've been very content with the offering otherwise.

iShares WLDS is a world small cap etf.@ 0.35% ( state street do one also for a higher charge)

If your keen to minimise costs then an accumulating ETF takes care of reinvesting dividends at no cost.

[TedSwippet]

And there’s still the 0.5% currency charge plus FX spread on conversion of USD dividends to GBP.

Unless your broker allows you to have a USD account. Some do but others, like HL, don't.

I've always been hazy on how useful this really is. Aside from odd edge cases such as moving to the US to retire, it seems to me that you either convert the dividend to GBP now and reinvest, or you invest the USD in something traded in USD but then convert that to GBP later to spend it. Forex both ways. Delaying the conversion may or may not fall in your favour.

Is there more to it than that?

[nathan]

Agreed re Forex spreads and commissions - it's just another way the low cost platforms have of shaving a bit off us. If my broker allowed a USD account I'd probably save it up before conversion but it's not a huge deal.

Regarding WLDS and accumulating ETFs, again it's a style thing, but I prefer to use the same base indices (not mixing MCSI and FTSE) if possible, as their region/sector definitions aren't identical. I also prefer distributing ETFs as they help me to separate income from capital growth and I can thus take the divs to rebalance the portfolio maybe once or twice a year.

I saw a Youtube video over the weekend from somebody who ditched Vanguard entirely with the following portfolio:

Developed Markets MCWS 54% (0.19% TER)
World Smallcap WLDS 18% (0.35% TER)
Emerging Markets EMIM 18% (0.18% TER)
Physical Gold SGLN 7.5% (0.20% TER)
Physical Silver SSLN 2.5% (0.20% TER)
Overall 0.21% TER

I'm not going down that route! Firstly, I like physically replicated ETFs (MCWS is synthetic - they did it to avoid the withholding tax). Secondly I prefer quarterly distributions to accumulators and thirdly, I don't want commodities (no divs and pay to hold them). It was a worthwhile benchmark exercise though.

Nathan

[mc2fool]

And there’s still the 0.5% currency charge plus FX spread on conversion of USD dividends to GBP.

Unless your broker allows you to have a USD account. Some do but others, like HL, don't.

I've always been hazy on how useful this really is. Aside from odd edge cases such as moving to the US to retire, it seems to me that you either convert the dividend to GBP now and reinvest, or you invest the USD in something traded in USD but then convert that to GBP later to spend it. Forex both ways. Delaying the conversion may or may not fall in your favour.

Is there more to it than that?

Well, clearly, if you start off with GBP and use it to buy a USD ETF, and then each time you get the USD dividends they get converted by your broker to GBP which you then reinvest back into the USD ETF, then over time there's going to be a lot of FX commissions and spreads and, of course, reduced returns 'cos you're reinvesting a smaller amount each time.

However, in a lot of cases that can be avoided by buying, as already noted, an accumulating ETF, and also, where available, the GBP class of an ETF.

USD accounts are, of course, more useful if you are actively trading in the US market, but that's for a different board ...

[TedSwippet]

USD accounts are, of course, more useful if you are actively trading in the US market, but that's for a different board ... :D

Makes sense, thanks. I was thinking only in the context of this particular case, a GBP traded ETF throwing off USD dividends.