Wednesday, 8 June 2016

Vanguard All World High Yield ETF - Yr 3 Update

It is now 3 years since my initial purchase of this global income ETF for my ISA. I’m always on the look-out for ways to diversify my portfolio. I also like to keep costs to a minimum - the annual ongoing charges are 0.29%.

The All World High Dividend Yield (VHYL) holds over 1,100 higher yielding large cap companies listed all around the world. The largest sector at 40% is USA followed by UK 11%, Switzerland 5.6%, Japan 5.6%, Australia 4.3% - other significant countries are France, Canada, Germany, China and Taiwan.

Top 10 holdings are Exxon Mobil, Microsoft, Johnson & Johnson, General Electric, Wells Fargo, Nestle, JP Morgan Chase, Novartis, Procter & Gamble, Verizon and AT&T.

Income

As with funds, all income is distributed so can be lumpy and unpredictable. For example, during the year to end June 2014, the distribution was $194.63 whereas in 2015 the distribution reduced to just $156.60 - 19.5% less in dollar terms. Unlike my investment trusts, I am never quite sure what income to expect at the end of each quarter - also there are FX considerations as the dollar distribution is converted to GB pounds. The original target yield was 4.0% and in my first year, this is close to what I received but it seems that was always going to be a tall order to meet - the current yield has fallen to ~3.0%.

My original purchase price in June 2013 was £31.60 and last year I topped up my holding giving an average price of £33.30. The current price is £34.00 and I have received income of  £4.47. My 3 year annualised returns todate are ~4% p.a. In my previous post I compared my basket of inv. trusts to my index funds over the past 5 years and was a little surprised to see the VHYL index annual returns at just 3.65%.

Comparisons

I had a look at the All World ETF (VWRL) returns for the past 3 years and they are 5.29% p.a. also Vanguard’s FTSE All World (ex UK) index fund has returned 8.4% p.a over the same period - this is more what I would expect given the S&P 500 is up 28% since June 2013. OK it excludes UK listed companies which will have some bearing but the VHYL has only 11% weighting so I would not think it should drag back returns by over 4% per year!

3 yr chart VHYL v FTSE Developed World (ex UK)
(click to enlarge)

I have also monitored progress to see how this ETF compares to my equity/bond Vanguard LifeStrategy 60. This has returned 5.37% p.a. over the past 3 years combined with less volatility….mmm pause for thought!

One advantage of holding this ETF within my Youinvest ISA is the avoidance of the 0.20% per annum platform charges levied on Vanguard funds. Also, there is no 0.5% stamp duty to pay on purchase.

However, with 3% natural yield and just 1% capital appreciation each year, I am missing out on an average 1.5% - 2.0% return each year - maybe 4% on my basket of investment trusts.

Given the natural yield is not great and the total return figures are lower than comparable global funds, I may consider a sale of this ETF and switch the proceeds to my lower volatility VLS60 fund at some point. I am just awaiting the quarterly dividend announcement for payment at the end of June and will then make a decision.


8 comments:

  1. Thanks for the update, diy.

    The Finance Zombie's 4% SWR experiment tells a similar story, with VHYL underperforming versus other Vanguard funds.

    VHYL makes up just 5% of my fund portfolio but I've held it for only around 2 years.

    I may just hang on to it for now and as I am thinking of looking at my entire portfolio when I hit my 3-year mark (investing) as I will review my allocations then.

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    1. weenie,

      Yes, I am not clear exactly why it is lagging other global funds - just as I do not know why the dividend dropped so markedly last year.

      I am glad I did not select it for your 'monkey' challenge - the VLS was the better choice so far and just over 3 months to go!

      The VHYL ETF is less than 3% of my portfolio so either way its not such a big change. It is currently trading at a high point for the past 12 months.

      I will check out the Finance Zombie post next time to follow progress.

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  2. Hi DIY,

    Interesting to read - I only recently dipped into the VHYL to give me some diversification, although to the tune of about 9% of my portfolio. As I am with TD Direct I steer clear of funds as they charge me ongoing for it so I am limited to ETF and Shares, but it is making me think maybe I Should just use the all world!
    London Rob

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    1. Rob,

      Yes, one of the reasons for holding ETFs (also ITs and shares) is the absence of platform charges.

      I now have another broker, Halifax with a flat fee charge of just £12.50 p.a. so that gives me more flexibility. It would be good to compare like ETFs v Index funds taking into account platform costs to see how they stack up. Sometimes the index fund charges can be significantly lower than the ETF charges which could offset some of the additional broker charges.

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  3. I have some units of this fund and like the diversification and usually decent yield - and often marvel at the ability to buy a small piece of over a thousand companies so easily.

    In any case, it might be that the value element isn't so attractive at the moment. With the FANG, mostly non-dividend paying, stocks doing so well up until recently, it might just be investors chasing that hot market looking for strong capital gains to the cost of those companies listed in the high yield fund.

    Might be that there's a mean reversion to come along as that is a pretty large performance gap between geographically at least similarly diversified funds?

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    Replies
    1. You could well be right TI about mean reversion - this crossed my mind as I was writing the article. Over time, everything should even out and this would be a good reason to hold on.

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  4. Thanks for the update John. I'm not massively into these income ETFs; I generally think investment trusts with progressive dividends are better, as you've pointed out.

    From an efficient market point of view (which is surely the correct point of view for a passive ETF) the yield is irrelevant anyway. If a hardcore passive investor wants more income they would just buy the global index and sell some units to increase their income beyond just the dividend.

    In terms of the ETFs underperformance, I think you might be being a bit harsh as it's only three years - hardly long enough to make a serious judgement about its performance. But having said that if I wasn't an active stock picker then I'd still rather just stick to progressive dividend investment trusts.

    - John

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    Replies
    1. John,

      For me, the yield is relevant for smaller holdings where it would not be cost efficient to sell shares/units.

      With my VLS I can sell my annual 4% to generate the income without the sale costs impacting.

      I agree 3 yrs is not such a long period to make an assessment and I may hold but either way, its not going to make much difference to my portfolio returns and income as it is quite a low percentage.

      Delete