Striking the Low-cost, High-yield Sweet Spot



Yan Pu
Head of Portfolio Review, Asia
Vanguard Investments Hong Kong Limited

A s the low interest rate environment lingers, more capital is entering income-oriented instruments to counter meager deposit rates. A fitting tool for this purpose is the dividend-paying ETF, which aims to generate a stable stream of income while minimizing costs. This trend plays to the strength of Vanguard – winner of this year’s Outstanding Achiever in the High Dividend ETF category – which is recognized for its edge in manufacturing low-cost products. BENCHMARK sat down with Yan Pu, Head of Portfolio Review in Asia, to talk about income investing and ETF market development.

BENCHMARK (BM): Vanguard’s expertise in delivering income at a low cost has once again won applauds. Besides your below market-average expense ratio, what are the other factors behind the success of your ETF products?
Yan Pu (YP): Thank you. We are grateful for the honor. As a pioneer in indexing for more than four decades, Vanguard draws on its deep experience and strong systematic selection, weighting, and rebalancing capabilities to manage its ETFs. As a result, our products were able to track the benchmark tightly, which is one of the key characteristics that define “successful” passive products.
In addition to lower-than-peers expense ratios, our high dividend ETFs feature strong liquidity, as evidenced by their high turn over and trading volume. Thanks to our strong relationships with brokers and solid market making support, our ETFs offer a tight bid ask spread, which also contributes to the popularity of our product.
BM: Among your most popular offerings are high-dividend ETFs. However, as global interest rates gradually rise, do you think investors’ appetite for dividend plays will be affected? And how will rising rates impact on investors’ asset-class preferences?
YP: This is a common question among dividend investors of late. Although interest rates are rising gradually, there is still a notable spread between the yield of high dividend and broad-market fixed-income strategies. To look to reduce a portfolio’s sensitivity to and potential losses from rising interest rates, especially in today’s environment, investors may consider substituting dividend-oriented equities for bonds. That said, though, dividend-oriented equities tend to have greater interest rate sensitivity than other equities, experiencing greater price declines when interest rates rise and greater price increases when rates fall.
Also, the downside is that substitution, or replacing bonds with high-dividend strategies, may expose investors to unintended consequences, such as losing the diversification benefits provided by bonds. It is also worth emphasizing that the potential drawdown risk of dividend oriented equities far exceeds that of bonds.
BM: On top of the potential bond-to equity shift you just mentioned, what kinds of major changes should dividend investors expect in the equity market, where valuations are already elevated? How should they position for these changes?
YP: Our research indicates that dividend oriented equity strategies are best viewed from a total-return perspective, taking into consideration returns from both income and capital appreciation. Global equity has already rewarded patient investors with a 15.5% annualized return over the 8 ½ years since the lows of the financial crisis.
With this in mind, our equity outlook for 2018 and beyond is modest, at best. Elevated valuations, low volatility, and secularly low interest rates are unlikely to be allies for robust financial market returns over the next five years, with downside risks more elevated in the equity market than in the bond market, making our equity outlook highly guarded.
In our view, the solution to this challenge is not shiny new objects or aggressive tactical shifts. Rather, our market outlook underscores the need for investors to remain disciplined and globally diversified, armed with reasonable return expectations and low-cost strategies.
BM: In low-cost strategies, ETFs are fitting choices. However, size begets size in the ETF market – the largest ETFs often enjoy more capital inflows thanks to their higher brand recognition. What should market players do to bring about a healthier ETF market development?
YP: To usher in a healthier ETF market development, we should understand investors’ needs for high-quality, high-value products. They often invest in investment products that will help them meet long-term goals and objectives. If a market participant consistently offers appropriate products for investors to achieve their goals, brand recognition can be built over time. Therefore, ETF issuers should focus on how to offer products with quality and value and give investors a good investment experience. BM





球低息環境持續,愈來愈多資本投進收入導向型產品來抵禦微薄的存款利率,其中一樣適用於此目的的投資工具是股息支付ETF,該產品旨在產生穩定的收入,同時把成本降至最低。這趨勢對於擅長設計低成本投資產品的領航非常有利,令公司贏得今年「交易所買賣基金公司大獎(高息ETF)」。 《指標》榮幸與領航投資亞洲區投資組合主管浦彥坐下來談論收入投資和ETF市場的發展。

浦彥:對高息產品有興趣的投資者而言, 這是最近遇到一個常見的問題。雖然利率正逐漸上升,但高息產品之收益與廣泛市場固定收益策略之間仍有明顯差距。為了減少投資組合對利率上漲的敏感度和潛在損失,特別是在當今的環境下,投資者可能會考慮用收息資產替代債券。儘管如此,收息型股票往往比其他股票具有更高的利率敏感度,當利率上升時價格下跌幅度更大,而當利率下跌時價格上漲幅度亦更大。
《指標》:在低成本策略中,ETF是合適的選擇。然而在ETF市場中,所謂「規模產生規模」,最大的ETF通常擁有更多的資本流入,這要歸功於其品牌認知度,市場參與者應如何推動ETF 市場更健康發展?