Income seeking investment - any feedback welcome

[BrummieDave]

I'm looking ahead to the next tax year's ISA and considering where to put my money.

Firstly some context. I'm a young retiree living comfortably off a DB pension (bread and butter), with additional income from the natural yield of predominantly ISA sheltered income focused ITs (jam). I'm very much a 'buy and hold' Doris, and don't tend to tinker, so any investment in April would need to be something consistent with this approach.

With (hopefully) a long time horizon to live from the combined DB and dividend income, I'm almost 90% in equities and happy to stay that way keeping that equity focus next year. I don't reach for the highest yield, but recognise that I'll probably enjoy spending a higher income now than in 30 years time so some front-end loading is fine by me.

So the investment that caught my eye for next year is a smart beta ETF, BMO MSCI UK Income Leaders UCITS ETF (ticker: ZILK). It focuses on large and mid cap UK stocks which appeals to me as many commentators consider this to be underpriced currently, and thus the yield is a very pleasant 5.5% for a comparatively low annual charge of 0.25%.

https://www.bmo.com/gam/uk/etf/etf-prod ... 23overview

Its method of selecting its constituents (ie its 'smart beta') is thus:

MSCI UK Select Quality Yield Index is based on the MSCI UK Index, its parent index which includes large and mid-capitalisation UK stocks. The Index aims to capture the performance of quality income stocks through a two step screening process; the first step is to identify the 50% of constituents of the MSCI UK Index, which score highest on three main fundamental variables: high return on equity (ROE), stable year-over-year earnings growth and low financial leverage. The second step is to identify the 50% of the securities identified through the first step which have the highest dividend yield. The Index rebalances on a semi-annual basis and is market capitalisation weighted with a 5% issuer cap.

Anyone any experience, or any thoughts?

It strikes me as having some of the attributes of a HYP, and is cheaper than an IT.

[Alaric]

Anyone any experience, or any thoughts?

You should take a look at what stocks get selected by the method and what the total return looks like. It's not unknown for struggling companies to boost their dividends, so a dividend yield of 5.5% may mask a capital loss in excess of this.

[BrummieDave]

Yes, the two step screening process which I outlined in my OP seeks to avoid that situation. It's exactly that which I'm attracted to, rather than the other ETFs like the UK dividend aristocrats which would be more susceptible to the concern you describe.

[tjh290633]

The words "smart beta" and "ETF" are both guaranteed to put me off. If you don't need the income, go for an IT like F%CIT or Witan.

TJH

[Lootman]

The words "smart beta" and "ETF" are both guaranteed to put me off. If you don't need the income, go for an IT like F%CIT or Witan.

The former might; the latter should not. Unless you have a problem with all tracker funds regardless of structure.

I do have a couple of beefs with what I saw on the link, however. Firstly the performance charts just show the fund price relative to the index the fund aims to follow. So the chart shows us how well the fund tracks that index, but tells us nothing about how well that specialised index did relative to the broader market (which I'd take to be the FTSE-350 in this case). Unhelpful to me. So whilst the OCF of 0.25% a year isn't bad, you could do better with a cap-weighted passive fund that targets the same market sector.

Secondly I don't really like their definition of "quality". I do think that quality is important. However part of what makes investing in quality shares both so attractive and so difficult is that there isn't a nice convenient definition of it. The three metrics chosen here are reasonable enough, in a sense. But they are things that can be measured and so, to my mind, are simply FA factors and not true measures of quality.

A true analysis of quality involves looking at the company's products and prospects, its moat, the worth of intangible factors like brand, management quality and so on. And by definition they are not well suited to any kind of metric, and therefore not suited to an ETF. No metric would have told you 30 years ago that Apple would add more shareholder value than any other in the history of investment. You had to look and understand beyond mere digits.

Fund managers like Train and Smith are advocates of quality, and it works for them. But if it were easy and could be commoditised, then we'd all buy ETFs instead, and we don't, at least not all the time.

Finally I don't know anything about BMO as an ETF provider. My own preference is to stick to the "big three" - iShares, Vanguard and State Street.

[BrummieDave]

BMO is 'Bank of Montreal' the 7th largest bank in North America, with assets of over CAN 710 billion. F&C became part of BMO in 2014 and renamed half a dozen or so of its ITs to the BMO brand late last year changing their tickers accordingly. Many will be aware for example that F&C Capital & Income (FCI) which I already hold became BMO Capital & Income (BCI).

If you have any kind of DB pension, or pooled investments (OEICs or ITs) you will very probably have money invested in, or by, BMO.

[TUK020]

MSCI UK Select Quality Yield Index is based on the MSCI UK Index, its parent index which includes large and mid-capitalisation UK stocks. The Index aims to capture the performance of quality income stocks through a two step screening process; the first step is to identify the 50% of constituents of the MSCI UK Index, which score highest on three main fundamental variables: high return on equity (ROE), stable year-over-year earnings growth and low financial leverage. The second step is to identify the 50% of the securities identified through the first step which have the highest dividend yield. The Index rebalances on a semi-annual basis and is market capitalisation weighted with a 5% issuer cap.

Anyone any experience, or any thoughts?

I don't know what the outcome is, but I have a sneaking suspicion that the 'HYP principle' that gets thrown out the window is possibly the most important one of all - sector diversification.

If this had been in existence in 2006, it would be chock full of financials.

I would need a lot of convincing, probably by looking at their actual stock composition, that would make me feel more comfortable with this than the more expensive to run CTY

[BrummieDave]

Thanks Lootman, appreciate you looking at the link and giving your considered view.

I've just done a comparison with the FTSE 350 using HL's website, and there is an underperformance.

Thanks TUK020, I had thought that myself. CTY doesn't cost a great deal more, and may be a better staple to add to (I already hold it).

[OhNoNotimAgain]

I'm looking ahead to the next tax year's ISA and considering where to put my money.

Firstly some context. I'm a young retiree living comfortably off a DB pension (bread and butter), with additional income from the natural yield of predominantly ISA sheltered income focused ITs (jam). I'm very much a 'buy and hold' Doris, and don't tend to tinker, so any investment in April would need to be something consistent with this approach.

With (hopefully) a long time horizon to live from the combined DB and dividend income, I'm almost 90% in equities and happy to stay that way keeping that equity focus next year. I don't reach for the highest yield, but recognise that I'll probably enjoy spending a higher income now than in 30 years time so some front-end loading is fine by me.

So the investment that caught my eye for next year is a smart beta ETF, BMO MSCI UK Income Leaders UCITS ETF (ticker: ZILK). It focuses on large and mid cap UK stocks which appeals to me as many commentators consider this to be underpriced currently, and thus the yield is a very pleasant 5.5% for a comparatively low annual charge of 0.25%.

https://www.bmo.com/gam/uk/etf/etf-prod ... 23overview

Its method of selecting its constituents (ie its 'smart beta') is thus:

MSCI UK Select Quality Yield Index is based on the MSCI UK Index, its parent index which includes large and mid-capitalisation UK stocks. The Index aims to capture the performance of quality income stocks through a two step screening process; the first step is to identify the 50% of constituents of the MSCI UK Index, which score highest on three main fundamental variables: high return on equity (ROE), stable year-over-year earnings growth and low financial leverage. The second step is to identify the 50% of the securities identified through the first step which have the highest dividend yield. The Index rebalances on a semi-annual basis and is market capitalisation weighted with a 5% issuer cap.

Anyone any experience, or any thoughts?

It strikes me as having some of the attributes of a HYP, and is cheaper than an IT.

Share prices are both signals and measures so any process that uses share prices to create an index or model portfolio has a positive feedback loop which is a fundamental flaw.

[richfool]

Share prices are both signals and measures so any process that uses share prices to create an index or model portfolio has a positive feedback loop which is a fundamental flaw.

OhNo, Does that mean that holders of that index or model portfolio will beat the market then?

BrummieDave, As you will be aware I favour IT's, so can't really comment on your suggested ETF. In the UK IT sector I favour CTY and FGT.

[Lootman]

Share prices are both signals and measures so any process that uses share prices to create an index or model portfolio has a positive feedback loop which is a fundamental flaw.

And where in the provided link does it say that weightings are driven by nominal share price?

The only index I know of that works that way is the Dow Jones Industrials Average.

That said in the US (but not the UK) it is considered a good sign if the nominal share price is high. Most obviously with Berkshire Hathaway, but also with names like Amazon and Alphabet.

[tramrider]

Anyone any experience, or any thoughts?

You should take a look at what stocks get selected by the method and what the total return looks like. It's not unknown for struggling companies to boost their dividends, so a dividend yield of 5.5% may mask a capital loss in excess of this.

The 3 year cumulative performance is only 15%. This is less than 3 years dividend, so there is capital loss.

https://www.bmo.com/gam/uk/etf/etf-products#--tabs-1547745739807-=undefined&fundUrl=%2FfundProfile%2FZILK%23price%26performance

The holdings are only 25 of the very usual HYP suspects. This seems a very small number for an ETF.

https://www.bmo.com/gam/uk/etf/etf-products#--tabs-1547745739807-=undefined&fundUrl=%2FfundProfile%2FZILK%23holdings

I think you should be able to do better than this, even with a small amount in an IT like RECI.

https://www.theaic.co.uk/companydata/BZGFP

Tramrider

[PrefInvestor]

Hi brummiedave, FWIW I hold ZILK along with a number of other high dividend paying ETFs (SEDY, ZWEU, ZWUK and IUKD). Ongoing costs are low (lower than most ITs), no stamp duty and small spread (so cheap to buy or trade). Only ~25 stocks though which is very small for an ETF and total size of the fund is only ~£3million which is also very small. For an ETF it can be quite volatile, though not as bad as single stocks obviously. I bought some more just recently as it has holdings in 3 house builders PSN, BDEV and TW which have been doing well of late and may do even better if brexit goes well. However it also holds TUI and WPP which got clobbered this week, single stocks are a big problem in this respect and I avoid them these days preferring ETFs or ITs.

Personally I like the yield of these dividend ETFs which is better than most equity based ITs. They also provide a cheap and easy way to obtain exposure to overseas stocks and currencies without the costs associated with investing directly in overseas stocks. Though not ZILK obviously which holds purely FTSE 100 stocks. Many equity ITs are in reality holding pretty much the same set of FTSE stocks if you look at their actual holdings, this can lead to overexposure to these stocks if you invest purely in a range of equity ITs and diversification is key IMV to minimise risk.

Good luck if you decide to invest. Fate very much tied to the FTSE though and not really clear where that is going in the next year. DYOR etc

ATB

Pref