TahiPanasDua wrote:ReallyVeryFoolish wrote:
If I said the purpose of the purchase would be to generate a high income for maybe 6 or 7 years with a view towards hopefully returning the capital to then reinvest elsewhere, would that influence your opinion?
I wouldn't do it.
I agree - neither would I.
One of the advantages of a
self-selected HYP, even one fishing in what might be seen as the more 'turbulent waters' of the ultra-high-yield market, is that the investor can choose
additional safety-level metrics as part of their
self-select process.
My concern with an ETF like IUKD is that the investment model is primarily based on the
single 'high yield' metric, with almost no regard for those extra potential safety and diversification checks that might accompany a self-select high-yield portfolio.
We can see this when we look at the current make-up of the IUKD holdings, where almost 50% of the ETF is invested in just
two UK sectors, with
Financial Services representing almost 30% of the holdings, and the
Cyclical Consumer sector representing 20% -
Image source -
http://www.morningstar.co.uk/uk/etf/snapshot/snapshot.aspx?id=0P000027DI&tab=3&InvestmentType=FEI have always considered that one of the big strengths of the classic HYP approach, with invested capital
evenly spread across a number of shares and sectors, allowed for the likelihood that market cycles will often cause sectors within those markets to ebb and flow, with some sectors seeing growth whilst some other sectors perhaps come under a bit of pressure. On the whole, it's envisaged that the even spread of investment capital across many market sectors will generally allow those sectors going through strong periods to balance out the effects of those that might comparatively suffer during those market-cycle movements.
What worries me about the IUKD approach, where a single 'high yield' metric is primarily used at any given time, is that this is likely to lead to the ETF always 'chasing' the current 'out of favour' sectors at any point in those market cycles. Seeing that 50% of IUKD capital is currently invested in the Financial Services and Cyclical Consumer sectors, those concerns seem to be valid.
On the face of it, I can see the attraction of this ETF, but given the above concern, and other more direct concerns that mean the ETF ends up investing in specific high-yield holdings that I personally wouldn't spend 2 minutes looking at, then I have to fully agree with TahiPanasDua in that I couldn't think it a suitable investment vehicle for the investment plan proposed.
Cheers,
Itsallaguess