What assets we own - Part 3 Our ETFs

This is part 3 of the 4 parts series about assets we currently own.

No. I am not big fan of cryptocurrencies yet as you might have already expected due to my investment conservatism. I might wake up, but currently I find such an investment unacceptably risky for many reasons.

Another investment which we hold are some exchange traded index funds. I believe we have started around 2013 and did not invest too much as we needed cash for our property purchases. All our ETF’s are listed on Australian stock exchange. I am happy to have stock market exposure and reasonable idea how ETFs work. ETFs are considered great investment. I have done quite a bit of reading on this type of investment in past but we got bit slack with proper managing it as the amount was not too big (just over six digits) and all our new funds went to savings account to prepare for next property purchase. On the other hand my attempt to partially reballance back-fired as I will describe below, where the ETF I have sold, grew another 30% in a year.

There are quite a few things on ETFs making them great assets in my view. It gives you exposure to most of the markets you choose. Lots of them paying good dividends. You can often choose if you would like to have your foreign ETF hedged or unhedged to manage currency exposure. You are getting much larger diversification than investing in individual stocks and much lower fees than in managed funds. As a cherry on the cake is 80-90% managed funds would probably after fees underperform index over 20 years period. So it is this kind of “invest and almost forget asset” requiring not much management. Selling and buying ETFs is probably even easier than buy stuff on Amazon, once you know what you want. Nobody will call you that they need to fix plumbing and your losses are limited to your holding. I consider investment to carefully selected ETFs great passive investment with minimum risks, great potential, perfect for retirement or side income with generally low management needs.

My major investment in ETFs is held in VAS from Vanguard which follows Australian ASX 300 index. Expense ratio is 0.16%. As I live in Australia and I have good faith in my country, I am happy with my choice at the moment. Though obviously I would make more money if I have invested all in unhedged US market which went up and our AU dollar went down. It is easy to give advice with hindsight. Some specifics for VAS are that financial institutions and mining companies cover half of the index. VAS pays good dividends (in the range of 4%), distributions are mostly franked (meaning you are getting credit for tax paid by the listed companies to avoid double taxing the profits).

Also further specifics of the Australian market is that it is small country (25million people) but quite stable, with developed strong economy and significant exposure to China. My other ETFs don’t pay such high distributions so most of my distributions are from VAS holding. I used to reinvest all distributions via dividend reinvestment plans. DRP are great as they are automatic and you don’t pay fees for getting new shares. But last year I was purchasing my current residence using pre-existing line of credit and I was supposed to decide if I should sell my ETFs to decrease debt. I have sold small amounts of VTS shares which unfortunately A) went up 30% afterwards and B) generated capital gains tax payable.

Though from current point of view I have luckily did not sell everything as A) and B) would be even more disappointing. Our solution was to leave drawn amount from line of credit same and cancel dividend reinvestment plans. And then use the cash flow from ETFs distributions to cover the extra interest from line of credit. Distributions were about 4% with some tax credits, interest on my line of credit is about 4.6% with part of it tax deductible. That looks to me as a reasonable solution. And NO capital gain tax payable plus I can keep my stock market exposure.

Another of my ETFs holding is VTS from Vanguard listed on Australian stock exchange. This one is darling of most of the FIRE community members for few reasons. One of them would be 0.03% fee. It is following Total US market index which covers 3600 listed companies comprising 100% of the US market. 20% of the index is exposed to technology companies. Also generally exposure to the US market gives exposure to the most of the world as US companies are trading heavily with most of the countries. It is unhedged which bumped up my holdings as AU $ went down significantly since we started investing into ETFs.

I have selected IVE ETF from Blackrock as a diversification from Vanguard. Vanguard will have similar ETF with lower fee but I wanted at least one holding away from Vanguard. Here expense ratio is 0.31%. Exposure is to EAFE MSCI index which is Europe, Australia and Far East. It covers basically developed economies except USA with largest exposure to Japan, UK, France, Germany and Switzerland being 70% of the index. IVE covers 900 listed companies. It is unhedged.

By now you have probably noticed that I am not trying to be as efficient as possible with my investments. I have educated myself sufficiently so I don’t need too much external advice and at least most of the time I know what I am doing. But I do believe that such an investment should be mostly set and forget without too much tinkering. Reality is nobody knows what will happen tomorrow and asset performing well last year has good chance it might not do that well next year. Most of it is just guess and gut feeling. I can see no point in chasing 1 or 2% in performance by being text book correct with diversification, timing, rebalancing, fees, etc. I am happy with average performance of selected index. We do like Vanguard and we will be happy to invest in ETF’s in future once we clear our property debt.

Next about pension funds (Australian Superfunds)

Continues in Part 4

What assets we own – Part 1 Australian property

What assets we own – Part 2 Our properties

What assets we own – Part 3 Our ETFs

What assets we own – Part 4 Our pension funds (Superfunds) investment