Sunday, 14 November 2010

Estimated Yield of iShares S&P Global 100

I am keen on producing high yields from my investments. Due to the strong Australian dollar, I have recently purchased on iShares S&P Global 100 ETFs (ASX: IOO). According to the iShares website, this ETF's distribution yield is estimated to be around 9.5 per cent, which seems very high. However, when I actually did the numbers myself using data on the ETF's actual distribution history, I noticed that the yield is more like 2 to 3 per cent. I am not saying iShares has misled anyone. On their site they clearly state that their figure is an estimate with various assumptions. Clearly iShares's assumptions were different to mine. I suspect that the main difference is that I took all the historical distributions from about three years back and then divided it by the current price. Perhaps iShares took the historical distributions and then divided it by a weighted average. Perhaps they also accounted for exchange rate fluctuations between the US dollar and the Australian dollar. It would make sense that this ETF would give low yields if you consider that currently the Australian dollar is strong and has been appreciating against the US dollar for a while now. If the Australian dollar were to suddenly pull back for whatever reason (e.g. American money printing actually turns out to be a valid plan that strengthens corporate America and and the US dollar with it) then I should expect yields on IOO to increase.

I am in a little bit of a dilemma because on one hand I want high yields but on the other hand I want to hedge against a collapse of the Australian dollar. I can hedge against a collapse of the Australian dollar if I buy US dollar denominated assets, but the problem is that as the US dollar weakens then my income from dividends gradually falls because the dividends are originally paid in US dollars and then is converted to Australian dollars. As the US dollar gets weaker, so too does the value of these dividends.

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