Income Investor: ETFs to tap emerging markets

As reported previously I have decided to diversify my real-life DIY Income Investor portfolio a bit more outside the UK.

Although I’m currently looking abroad, the portfolio will continue to concentrate on my home currency - this income will pay the bills, without taking on additional currency risks. In addition, many of the shares and fixed-income securities quoted on the London Stock Exchange have extensive international exposure.

Seeking resilience and transparency

The way I have chosen to do this is using Exchange Traded Funds (ETFs), which are (generally) transparent, cost-efficient, liquid vehicles that trade on stock exchanges like normal securities. I have looked at high-yield ETFs, which do the admin for you, as well as diversifying among a number of holdings. The charge made by ETFs for this service (indicated approximately as the Total Expense Ratio (TER) is modest, compared to the charges levied by most mainstream ‘funds’.

For added peace of mind I plan to invest in ETFs that hold physical securities (i.e. as opposed to ‘synthetic’ ETFs), hoping that this will prove more resilient in the next market melt-down - and which follow a specific (and specialised) index.

My high-yield portfolio is split 50%/50% between dividend shares and fixed-income, and I propose to continue this allocation approach by investing in matching pairs of ETFs that deal in high-yield shares and corporate bonds. For this bit of geographical diversification I have chosen ‘Emerging Markets’ - this is a more flattering term for what is essentially the ‘Wild West’ of global investing.

Dividend hunt

The first of this 'Emerging Markets' pair of ETFs is the SPDR S&P Emerging Markets Dividend ETF, which is an open-end, UCITS-compliant (EU standard for collective funds), ETF domiciled in Ireland and managed by State Street.

The aim of the SPDR S&P Emerging Markets Dividend UCITS ETF is to track the equity market performance of high-yielding stocks from emerging markets, tracking the S&P Emerging Markets Dividend Opportunities Index as closely as possible. The managers quote the weighted average of gross dividend yield of stocks in the fund as around 7.5% (although this is not the dividend yield of the fund, which is nearer 6.5%, as far as I can work it out) with an average p/e of 9.3. Dividends are paid semi-annually.

The ETF is quoted in GBP on the LSE. The top holdings are diversified geographically including Poland, Turkey and Brazil. The Total Expense Ratio is 0.65% - a bit pricey but then this is a huge geographical spread to deal with.

Income fix

To match this 'Emerging Markets' dividend ETF, I have bought an equivalent fixed-income ETF - one which invests in the 'liquid local currency emerging markets debt market'.

The SPDR Barclays Emerging Markets Local Bond UCITS ETF, is an open-end, UCITS-compliant (EU standard) Exchange Traded Fund, domiciled in Ireland and managed by State Street. This ETF tracks the Barclays Emerging Markets Local Currency Liquid Government Index as closely as possible.

This ETF is priced in US$ on the LSE (making my portfolio spread sheet calculations just that little bit more complicated). The managers claim a current yield is over 8% (with a yield-to-maturity of nearly 5%) but my own calculations based on the last distribution put the ETF yield at around 4.5% - the information on the actual yield that an investor would receive is a bit opaque, to say the least. The distribution of income is also semi-annual.

The top holdings are things like:

• BLTN 0 01/01/14
• RFLB 8.15 02/03/27
• MBONO 6 06/18/15

(Of course, Citywire Money readers will be familiar with these… Or not).

The Total Expense Ratio is 0.55% but when you look at the range of obscure securities the ETF follows, this looks like a reasonable price to pay for this degree of diversification.

[Note: the fact that these are both SPDR (State Street Global Advisers) ETFs is that these seemed to be the easiest to find that fitted the bill - there are probably others that will do a similar job.]

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