High yield ETFs

[wayneL]

I occasionally run a dividend yield scan via https://www.marketindex.com.au/highest-dividend-yield

There are a few ETFs there that have quite impressive yields... Clealry the charts not those that you will trade on momentum.

...but as we are approaching the widow's, orphans, and old farts category, I thought those more FA adept than me my offer some opinions?

See link for those.

 

[Sean K]

I occasionally run a dividend yield scan via https://www.marketindex.com.au/highest-dividend-yield

There are a few ETFs there that have quite impressive yields... Clealry the charts not those that you will trade on momentum.

...but as we are approaching the widow's, orphans, and old farts category, I thought those more FA adept than me my offer some opinions?

See link for those.

RF1 26%! Crikey, sign me up.

 

[KevinBB]

@wayneL I haven't looked at this type of ETF for a while. Last time I looked the unit holder was (essentially) trading franked dividends for a capital loss.
Turned me off them forever (or even longer).
KH

 

[Sharkman]

not sure how useful this is, as they don't appear to be stripping out the likes of special divs and one off capital returns. if one is to make something of this list, one probably has to delve a bit deeper into the entries of interest and investigate what the situation is with them.

eg. there's no way IHVV should be yielding 20%, it's basically a currency hedged version of Blackrock's S&P 500 index ETF, the yield on the S&P 500 is barely above 1%. i don't own IHVV (only the unhedged IVV) so i don't know the reason behind it, but there was a massive $92 distribution this year (on a $460 ETF). it has to have been some sort of capital return.

 

[wayneL]

I'm of the thinking that anything that seems to be good too good to be true, probably is, hence my query here.... Especially with regards to ETFs.

But then there are the others in that list.

 

[over9k]

not sure how useful this is, as they don't appear to be stripping out the likes of special divs and one off capital returns. if one is to make something of this list, one probably has to delve a bit deeper into the entries of interest and investigate what the situation is with them.

eg. there's no way IHVV should be yielding 20%, it's basically a currency hedged version of Blackrock's S&P 500 index ETF, the yield on the S&P 500 is barely above 1%. i don't own IHVV (only the unhedged IVV) so i don't know the reason behind it, but there was a massive $92 distribution this year (on a $460 ETF). it has to have been some sort of capital return.

I'm of the thinking that anything that seems to be good too good to be true, probably is, hence my query here.... Especially with regards to ETFs.

But then there are the others in that list.

Correct: https://www.commsec.com.au/education/learn/choosing-investments/what-is-distribution-yield.html

Each etf is different but they often do cash return of equity to holders twice a year just like a dividend payment, but remember that a return of equity is not a dividend so isn't taxed in the same way.

For example, in my case holding LNAS: https://www.etfsecurities.com.au/product/lnas

I had a whole stack of money paid out (after tax was withheld) at the end of last financial year. I think it might have been the fund's total capital gain for the year (which would make sense) but I'd have to go back & check.

So if the fund gained 40% and then returned all of that to shareholders it's going to look like a "yield" of 40% when in reality it's just a 40% capital gain being cashed out & then paid to the holders. That's distribution yield vs dividend yield, remember they are two different things and go under two different sections on your tax return.

There's obviously all kinds of tax implications, especially if it's a foreign index tracking etf like LNAS where it actually counts as foreign source of income (and then you get foreign capital gain vs foreign dividend), so you need an accountant that knows their stuff here.

 

[over9k]

Here you go, $6.83 distribution on the 30th of june:

And then as you can see, it sold off by almost exactly that amount on 1 july (not the exact amount as there's a day's worth of trading movement to be factored in) as that equity obviously no longer existed in the fund:

So yeah, just think of it as a fund's capital gain being cashed out to you and that cashout being called a "yield", because that's literally exactly what it is. It's no different to you selling the shares off yourself and pocketing the cash but the fund instead decides when and how much it's going to do it for you.

Just remember that unless you provide them with your tax file number, the tax gets withheld and then you claim it back vs you declaring the whole income and then paying taxes on it. I got quite the fright when I wondered where the rest of my distribution was after forgetting this.

They might also have distribution reinvestment plans just like dividend reinvestment plans but that's obviously at the fund's discretion. Remember that you have to opt-in to these too just like with a DRIP.

 

[wayneL]

Here you go, $6.83 distribution on the 30th of june:

View attachment 134685

And then as you can see, it sold off by almost exactly that amount on 1 july (not the exact amount as there's a day's worth of trading movement to be factored in) as that equity obviously no longer existed in the fund:

View attachment 134686

So yeah, just think of it as a fund's capital gain being cashed out to you and that cashout being called a "yield", because that's literally exactly what it is. It's no different to you selling the shares off yourself and pocketing the cash but the fund instead decides when and how much it's going to do it for you.

Just remember that unless you provide them with your tax file number, the tax gets withheld and then you claim it back vs you declaring the whole income and then paying taxes on it. I got quite the fright when I wondered where the rest of my distribution was after forgetting this.

They might also have distribution reinvestment plans just like dividend reinvestment plans but that's obviously at the fund's discretion. Remember that you have to opt-in to these too just like with a DRIP.

I'm definitely going to have to cut down my trolling on Twitter so I've got more time to research this sort of stuff. LMAO

 

[divs4ever]

I occasionally run a dividend yield scan via https://www.marketindex.com.au/highest-dividend-yield

There are a few ETFs there that have quite impressive yields... Clealry the charts not those that you will trade on momentum.

...but as we are approaching the widow's, orphans, and old farts category, I thought those more FA adept than me my offer some opinions?

See link for those.

SUL was the surprise appearance for me ( i hold SUL )

i was nibbling at them from May 2014 ( @ $9.15 ) to March 2018 ( @ $6.47 ) and while is am up about 49% currently , it looks like i will regret later not continuing the nibbles until the end of 2020 )

 

[Belli]

Each etf is different but they often do cash return of equity to holders twice a year just like a dividend payment, but remember that a return of equity is not a dividend so isn't taxed in the same way.

Yes, it can be confusing. The two I hold, VAS & VGS, make quarterly distributions. As you would know they are tax-through entities. For some who are not familiar with ETFs, one issue which should be considered in the Annual Tax Statement as that drives the components to be included in a personal tax return. Something similar to this will be issued after the end of the FY depending on the specific ETF.

The other factor is the AMIT cost excess/shortfall which adjusts the cost base of the holdings for that financial year. The statement at the base of the advice "Please retain this statement for Income tax purposes" isn't just about a specific FY but comes into play when the ETF is sold. No idea how this issue accounted for for those who trade an ETF in a FY.

I do know shortly after each distribution Vanguard advises to the ASX the Distribution Tax Estimates (now in actual $ rather than percentages as previously.) I assume other ETFs advise the same after a distribution. Whether this announcement is useful for traders I wouldn't know.

https://www.asx.com.au/asx/statistics/displayAnnouncement.do?display=pdf&idsId=02430788

 

[Belli]

Did a quick search and found this article from Betashares which covers the basics of ETFs.

What is an ETF? Explaining Exchange Traded Funds

Learn about ETFs and their benefits in minutes with our comprehensive and easy breakdown of Exchange traded funds.

www.betashares.com.au

 

[Sean K]

I'm definitely going to have to cut down my trolling on Twitter so I've got more time to research this sort of stuff. LMAO

You troll on twatter? I find that hard to believe.

 

[wayneL]

You troll on twatter? I find that hard to believe.

It is a spiritual calling, Sean.

Hence my dilemma

 

[Belli]

eg. there's no way IHVV should be yielding 20%, it's basically a currency hedged version of Blackrock's S&P 500 index ETF, the yield on the S&P 500 is barely above 1%. i don't own IHVV (only the unhedged IVV) so i don't know the reason behind it, but there was a massive $92 distribution this year (on a $460 ETF). it has to have been some sort of capital return.

https://www.asx.com.au/asx/statistics/displayAnnouncement.do?display=pdf&idsId=02392211

I found this link the other month which for me is useful to look at announcements of a particular company. It goes back to 1998 but, no, I haven't bothered.

Historical announcements

Search for recent and past announcements

www2.asx.com.au

 

[divs4ever]

not sure how useful this is, as they don't appear to be stripping out the likes of special divs and one off capital returns. if one is to make something of this list, one probably has to delve a bit deeper into the entries of interest and investigate what the situation is with them.

eg. there's no way IHVV should be yielding 20%, it's basically a currency hedged version of Blackrock's S&P 500 index ETF, the yield on the S&P 500 is barely above 1%. i don't own IHVV (only the unhedged IVV) so i don't know the reason behind it, but there was a massive $92 distribution this year (on a $460 ETF). it has to have been some sort of capital return.

so then , what are the chances most of the gain is currency exchange rates ??

just asking , because unless there is 'a special sauce ' in some tiny detail somewhere the hedging could be the difference ( currency hedging can be a pain or a bonus )

 

[KevinBB]

well, a deep dive into this document (the 2021 Financial Report), and also a refresher of what happened during this 12 month period, will indeed show that the very high yield for IHVV is justified.

Please remember, too, that in Australia, these ETFs have similar features to trusts as far as Australian tax laws go, i.e. any gains during the year must be distributed to unit holders, and will be declared in the unit holders' tax returns.

The 12 months to June 2021 was probably one of the best 12 months to be invested in the share market. The US S&P 500 index, the index upon which IHVV is based, went from 3100 to 4288 during the period in question, a rise of 38%. This would account for the large gains recorded through IHVV's P&L.

@Belli posted a document a couple of posts ago, that document is an extract showing how the distribution is applied for Australian tax purposes. 76% of the distribution is classed as foreign income, most likely as a result of the frequent trading of stocks caused by the need to rebalance to the S&P 500 on a daily basis, as these type of ETFs do.

That 12 months was pretty wild, especially in the 2020 six month period. I know from experience that I was chasing stocks in the sectors moving quicker than other sectors, and if little Kev was doing this, then I'm sure larger investors were doing this too. All up, this chasing of "in" sectors would have caused frequent rebalancing by these index-hugging ETFs. This is borne out by the Balance Sheet (Pg 12), which shows that IHVV was worth $649m at 30 June 2021, and the Statement of Cash Flows (Pg 17) shows that $468m of shares was sold and $427m was purchased. Quite a high turnover of shareholdings.

Such trading would, I have no doubt, be treated as income, and not capital gains, purely because of the size and frequency of the transactions, and the document displayed by Belli supports this. Only 24.2% of the year's distribution (2 x 10.3046% + 3.6016%) was considered by the ETF's managers to be capital gains, most of which was for longer term gains on sale of shares held for more than 12 months.

Maybe a better pair of eyes than mine can find forex income in the financial statements. I couldn't, it all seems to be mixed in to gains on financial instruments. But, during that period the Aussie dollar rose from approximately 0.694 to 0.753 against the US dollar, roughly 10%. Maybe a smarter mind than mine can work out what the result of IHVV's hedging would have been during this time.

It was a very good year to be invested in the US share market with its 38% gain. As a comparison, the Australian market (as measured by XJO) rose only by 24%.

Damn! Shouldn't have researched this. The Hindsight Investor has won again.

KH

 

[wayneL]

well, a deep dive into this document (the 2021 Financial Report), and also a refresher of what happened during this 12 month period, will indeed show that the very high yield for IHVV is justified.

Please remember, too, that in Australia, these ETFs have similar features to trusts as far as Australian tax laws go, i.e. any gains during the year must be distributed to unit holders, and will be declared in the unit holders' tax returns.

The 12 months to June 2021 was probably one of the best 12 months to be invested in the share market. The US S&P 500 index, the index upon which IHVV is based, went from 3100 to 4288 during the period in question, a rise of 38%. This would account for the large gains recorded through IHVV's P&L.

@Belli posted a document a couple of posts ago, that document is an extract showing how the distribution is applied for Australian tax purposes. 76% of the distribution is classed as foreign income, most likely as a result of the frequent trading of stocks caused by the need to rebalance to the S&P 500 on a daily basis, as these type of ETFs do.

That 12 months was pretty wild, especially in the 2020 six month period. I know from experience that I was chasing stocks in the sectors moving quicker than other sectors, and if little Kev was doing this, then I'm sure larger investors were doing this too. All up, this chasing of "in" sectors would have caused frequent rebalancing by these index-hugging ETFs. This is borne out by the Balance Sheet (Pg 12), which shows that IHVV was worth $649m at 30 June 2021, and the Statement of Cash Flows (Pg 17) shows that $468m of shares was sold and $427m was purchased. Quite a high turnover of shareholdings.

Such trading would, I have no doubt, be treated as income, and not capital gains, purely because of the size and frequency of the transactions, and the document displayed by Belli supports this. Only 24.2% of the year's distribution (2 x 10.3046% + 3.6016%) was considered by the ETF's managers to be capital gains, most of which was for longer term gains on sale of shares held for more than 12 months.

Maybe a better pair of eyes than mine can find forex income in the financial statements. I couldn't, it all seems to be mixed in to gains on financial instruments. But, during that period the Aussie dollar rose from approximately 0.694 to 0.753 against the US dollar, roughly 10%. Maybe a smarter mind than mine can work out what the result of IHVV's hedging would have been during this time.

It was a very good year to be invested in the US share market with its 38% gain. As a comparison, the Australian market (as measured by XJO) rose only by 24%.

Damn! Shouldn't have researched this. The Hindsight Investor has won again.

KH

Jezzuz... I'm off to have a drink and I will be back to re-read that.

...and thanks.

 

[Belli]

Maybe a better pair of eyes than mine can find forex income in the financial statements. I couldn't, it all seems to be mixed in to gains on financial instruments.

Don't know about better eyes @KevinBB and probably someone with accounting ability can answer but this is from the 2021 annual report. Net gains is part of the investment income (on page 10)

 

[KevinBB]

Yep, all mixed in one. I guess as far as the financial statements go, a income from gains on a futures contract (AUDUSD) is the same as shareholding trading income (IVV units).

Thinking about it a bit further, with the rise in the value of AUD during that period, IHVV would have been selling USD, buying AUD to try to keep it's holding in IVV units constant in AUD terms. (hoping my logic is right here).

KH

 

[Belli]

Damn! Shouldn't have researched this. The Hindsight Investor has won again.

It's unfair I know but I blame you. First time I have ever look at it and it's likely to be the last. No way could I get my head around this. Seems to be it holds IVV and the rest is cash or forward contracts

iShares S&P 500 (AUD Hedged) ETF | IHVV

The fund aims to provide investors with the performance of the S&P 500 Hedged AUD Index, before fees and expenses. The index is designed to measure the AUD hedged performance of large capitalisation US equities.

www.blackrock.com