Question 1: I like watching and learning about your investment strategies and also get a lot out of the webinars you run. Do you have a view on the income ETFs, as an alternative to holding stocks independently as per your income portfolio? I see iShares has a high-dividend ETF and there are others.
Answer (By Paul Rickard): The income ETFs are an alternative way to do it – although not the same. You can be pretty certain that you will get an ‘index’ return.
Vanguard’s ‘Australian Share High Yield’ ETF (ASX Code VHY) tracks the FTSE ASFA High Dividend Yield Index. Although it is a market capitalisation weighted index, it uses forecast dividend yields to work out the underlying index constituents. Over the 12 months to 31 October, it has returned a pretty impressive 32.65% (after fees).
iShares S&P/ASX High Dividend ETF (ASX Code IHD) tracks an index called the S&P/ASX Dividend Opportunities Index. This index comprises 50 stocks out of the ASX 300, selected according to yield, profitability, dividend stability and some other factors. The ETF has returned a less impressive 28.70% over the same 12-month period.
Interestingly, the largest stocks in the S&P/ASX Dividend Opportunities Index are Mineral Resources and Adelaide Brighton. Financial stocks only comprise 21.15% of the index.
Russell has the Russell High Dividend Australian Shares ETF (ASX Code RDV). It tracks the Russell Australian High Dividend Index, which comprises up to 50 larger cap companies, selected from those that are expected to make higher dividend payments. CBA is the fund’s largest holding – and 44.7% of the fund is in financials. Over the 12 months to 31 October, the fund has returned 31.12%.
As I said at the beginning, you will get an ‘index return’ – so it is worth understanding what the index is. I am not sure I am a huge fan of the iShares ETF (or more precisely, the S&P/ASX Dividend Opportunities Index), so if you are contemplating an ETF option, I would be inclined to look at Vanguard’s VHY followed by Russell’s RDV.
Question 2: My SMSF is in pension mode. I am looking at buying around $20,000 in a Vanguard fund. Can you see much difference between the High Yield Australian Shares Fund and the Index Australian Shares Fund (other than one is more conservative than the other?
Answer (by Paul Rickard): Assuming that you are talking about the Vanguard ETFs (the Vanguard Australian Shares Index ETF – ASX Code VAS; and the Vanguard Australian Shares High Yield ETF – ASX Code VHY), they differ as follows:
- The former tracks a pure market capitalisation based index (S&P/ASX 300), while the latter follows a derived index (also market capitalisation, but based on forecast dividend yields) – the FTSE ASFA High Dividend Yield index;
- Management fees – VAS is 0.15% pa, VHY is 0.25% pa;
- Performance in the recent short term has been very different – in the 12 months to 31 October, the pure market cap ETF (VAS) returned 24.65% after fees – the high yield ETF returned 32.65%. These returns include both growth and income.
The last 12 to 18 months in the market has been fairly unique, where all the action has been in the higher yield stocks, such as the banks and Telstra. So, it is not surprising that the high yield ETF has done a lot better than the pure market cap ETF. Over the long term, however, you would probably expect the pure market cap ETF to produce a higher return (with more variability/volatility) than the high yield ETF.
In pension phase, if income is important or you require less volatility in the capital value, it could sway the argument marginally in favour of the high yield ETF. In accumulation or in pension phase, where these aspects aren’t that important, I would elect for the pure market cap ETF (VAS).
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.
Also in the Switzer Super Report:
- Charlie Aitken: QBE a buy on QE tapering [1]
- Penny Pryor: Buy, Sell, Hold – what the brokers say [2]
- Geoff Wilson: Graincorp – the odds are in your favour [3]
- Barrie Dunstan: Why you need international shares [4]
- Uday Cheruvu: Try this global blue chip – Chicago Mercantile Exchange Group [5]
- Tony Negline: How much is enough? [6]