Why are gilt ETF yield so low

pgalland

Hi,
i am trying to understand why gilt ETF yields are so disconnected with the current BoE rate of 4%. 

I cannot seem to find a single gilt ETF w a yield above 3% - including 0-5yr maturity. 

Surely in a perfect market, the gilts that were issued prior to the rate rises at a lower rate should have dropped in value over the past 12months to the point where the yield aligned to current rate of issue? If not, why would anyone want to buy those gilts or hold them over new issues? 

If someone could help me understand I would be grateful.

masonic

The yield of a fund is normally expressed as income from the previous 12 months divided by the current price and excludes capital uplift in gilts approaching maturity. The figure that is most relevant for a long term investor is not the yield, but the Yield To Maturity (YTM), which is forward looking and based on total return. For example, VGOV has a YTM of 3.5%, but a trailing yield of just 1.91%. The YTM is what you would get if the fund stopped investing in new gilt issues and let its current portfolio run to maturity. Neither figure is an indication of the return you will get over a finite holding period. If you want a known return, then you'd need to invest directly in individual gilts.

Gilt yields are not dependent on the BoE base rate, their initial yield is determined by an auction and the yield if purchased on the secondary market is determined by market sentiment. See https://www.bankofengland.co.uk/statistics/yield-curves for the current state of play.

pgalland

Thanks masonic, it makes sense. The tricky part is that a YTM doesn’t really help much make a decision given that most ETF keep buying gilts on a rolling basis - and hence the fund never reach its maturity. The yield then becomes unpredictable over the life of the investment. You become subject to the fluctuations of the yield curve. 

I want to diversify my portfolio w an established and predictable income stream as I am 100% invested in stocks. Based on your response, I might decide to build a portfolio of individual commercial bonds myself and hold them to maturity (obviously w the higher credit risk that comes w corp bonds)

masonic

Several platforms allow direct trading of individual gilts, though it's not always well advertised.

pgalland

Any recommendation in particular?

Linton

pgalland said:

Any recommendation in particular?

ii and HL sell some gilts online. If the gilt is not available online you will have to use their telephone dealing service. AJBell only sell gilts by phone. Bestinvest it would seem don’t sell gilts at all. I don’t know about other platforms.

aroominyork

A curiosity with ii is that you can buy part units but to sell online you have to round down, eg you can buy 99.8 shares but have to sell 99 shares. Maybe phone dealing lets you sell the full holding.

GeoffTF

aroominyork said:

A curiosity with ii is that you can buy part units but to sell online you have to round down, eg you can buy 99.8 shares but have to sell 99 shares. Maybe phone dealing lets you sell the full holding.

I have looked at my records. I bought gilts online with Squaregain (which no longer exists) and received a fractional amount. I have more recently bought gilts over the telephone with iWeb, and also have a fractional amount. If you specify a value in pounds rather than a number a shares, you are likely to get a fractional amount. The same applies to OEICs.

cwep2

Would recommend Fineco for this if you want online point and click dealing. Italian firm but fully regulated as UK bank here (has FSCS protection on deposits up to £85k etc.).

Can see two way prices and search for individual bonds easily enough by country/duration/currency etc. Dealing costs are cheap. Can even leave limit orders. They definitely have good spectrum of government bonds (globally) but I haven’t searched for corps. 

Because you are dealing on exchange you almost certainly have to deal in full amounts of bonds and probably round amounts. If you are happy in dealing in multiples of £1k size per bond it will be fine. When the dealing cost is £5-10 then doing smaller amounts starts to eat significantly into the yield anyway. 

aroominyork

GeoffTF said:

aroominyork said:

A curiosity with ii is that you can buy part units but to sell online you have to round down, eg you can buy 99.8 shares but have to sell 99 shares. Maybe phone dealing lets you sell the full holding.

I have looked at my records. I bought gilts online with Squaregain (which no longer exists) and received a fractional amount. I have more recently bought gilts over the telephone with iWeb, and also have a fractional amount. If you specify a value in pounds rather than a number a shares, you are likely to get a fractional amount. The same applies to OEICs.

Yes, but you can sell fractional amount of OEICs.

GeoffTF

aroominyork said:

GeoffTF said:

aroominyork said:

A curiosity with ii is that you can buy part units but to sell online you have to round down, eg you can buy 99.8 shares but have to sell 99 shares. Maybe phone dealing lets you sell the full holding.

I have looked at my records. I bought gilts online with Squaregain (which no longer exists) and received a fractional amount. I have more recently bought gilts over the telephone with iWeb, and also have a fractional amount. If you specify a value in pounds rather than a number a shares, you are likely to get a fractional amount. The same applies to OEICs.

Yes, but you can sell fractional amount of OEICs.

Sorry, I see your point. I bought and sold over the phone with AJ Bell. I do appear to have lost a fractional amount, but the money involved was negligible. The best plan is to hold to maturity to avoid half the spread.