Burgeman, regional director for London at the firm, says that not only is the yield on the UK-focused ETF impressively high compared with many active funds at 4.15 per cent, but the constituent stocks are different from those in most active funds. The ETFs are an interesting contributor to a well-diversified portfolio, he says, and are better-constructed than other passive options.
“It is now five years since interest rates moved to record low levels and, while the next move will undoubtedly be up, this seems unlikely to take place imminently,” he said. “So, for the long-suffering saver, the hunt for income goes on.”
“There is an ongoing debate about whether savers should use active or passive vehicles for the investments.”
“For what it is worth, we are agnostic on the issue. Some active fund managers can certainly demonstrate a long-term track record of adding value to their funds. Others, less so.”
“However, for savers looking to produce an income stream for their investments, passive vehicles present something of a problem.”
“The simplistic approach of taking the highest yielding shares in an index can often leave investors holding the wrong stocks at the wrong time and a series of value traps.”
“One alternative to consider for investors could be the SPDR S&P Dividend Aristocrat series of funds.”
“These exchange traded funds, run by the respected US institution State Street Global Advisers, are listed on the London Stock Exchange and offer a cost-effective approach to income diversification.”
Rather than simply chasing the highest-yielding stocks, the funds restrict themselves to the highest-yielders that have also maintained or increased their dividend for an extended period of time to avoid the problem of value traps [stocks that are cheap and high-yielding because of an incorrigible slump in performance].
The UK Dividend Aristocrats ETF invests in the 30 highest-yielders from the S&P Europe Broad Market index that have increased or maintained their dividends for a minimum of a decade.
The appeal to the cost-conscious is the low ongoing charge of 0.3 per cent, although as with shares, investors have to pay dealing costs to buy and sell.
“Interestingly, its top holdings include Balfour Beatty, Amlin, Carillion, ICAP and Vodafone, which is rather different to most managed income funds,” Burgeman said.
The fund’s biggest sector exposure is media, at 11.4 per cent of AUM, not a sector that features highly in most equity income funds.
Data from FE Analytics shows the ETF has returned 37.92 per cent since it was launched in February 2012 while the average IMA UK Equity Income fund has returned 34.39 per cent and the FTSE 100 22.9 per cent.
Performance of fund vs sector and index since launch
Source: FE Analytics
These returns would place it in the second quartile, ahead of 67 of the 94 active funds. The fund’s yield puts it just inside the top quartile of the active funds.
S&P US Dividend Aristocrats has a slightly longer history, having been launched in October 2011. It charges 0.35 per cent.
It has produced a 49.98 per cent total return over that time, ahead of all but the Threadneedle US Equity Income fund of the limited number of US equity income funds on the market.
In that time the S&P Composite 1500 index has made 58.98 per cent, according to FE data. The ETF’s total return would put it just within the second quartile of the IMA North America sector.
Performance of fund vs index since launch
Source: FE Analytics
“This is, in some ways, an even more conservatively run fund, as it features the 60 highest-yielding stocks from the US S&P 1500 Composite Index that have paid an increased dividend every year for 25 years,” Burgeman said.
The fund’s yield of 2.67 per cent compares well against other US income funds: only Neptune US Income and IFSL Harewood US Enhanced Income pay out more.
“Its biggest holdings are AT&T (the US telecoms giant), HCP Inc (a health care property company), Consolidated Edison (utility), National Retail Properties (US shopping malls) and Kimberly-Clark,” Burgeman said.
There is also a Euro Dividend Aristocrats fund, which tracks the 40 highest-yielding eurozone companies on the S&P Broad Market Index that have maintained or increased their dividend over at least a decade. The ongoing charges are 0.3 per cent.
The fund has made 34.01 per cent in total return terms since launch, compared with 35.53 per cent from the DJ Euro Stoxx index, according to FE data.
Performance of fund vs index since launch
Source: FE Analytics
It is yielding 3.81 per cent, which would put it in the top quartile of the 14 European equity income funds in the IMA universe.
Chris Mayo, investment director at Wellian Investment Solutions, says that the typical problem that investors in passives for income have is that it is hard to maintain a decent level of yield.
Wellian runs a series of model portfolios using active funds and a mirror range using passives, although not ETFs, and Mayo says that it is impossible to maintain the same sort of yield on the passive range.
For example he uses Vanguard FTSE UK Equity Income, whose pay-out of 3.99 per cent is consistent with the target of the IMA UK Equity Income sector of 110 per cent of the yield on the FTSE, but not outstandingly high.
For anyone building a portfolio of passives, it is impossible to get the yield higher, he explains. The 4.15 per cent on the State Street ETF looks very appealing in light of this.
It is the criterion of choosing only the “dividend aristocrats”, or those with a long track record of increasing their dividend that makes the range stand out and seems to overcome the problems that Mayo highlights. However, the range only has a short track record.
Chris Spear, managing director of Spear Financial Services, says that he still prefers active funds for income even though he has been looking at the State Street funds.
“There are so many opportunities around at the moment with things like Unilever or Standard Chartered that have had a terrible year that you need an active manager to take advantage of,” he said.
All three funds in the range are domiciled in Ireland.
