In an earlier post I mentioned that I split my money evenly between 4 different ETFs: IJH, VGAD, DJRE and VAS. Whenever there is a reason for me to worry about them all I need to do is have a look at what they (and therefore I) own. These examples are just a few of the TENS OF THOUSANDS of businesses and properties that I own through just these investments. Pretty cool stuff I think!
IJH: 400 of the most promising up-and-coming companies in the capitalist mecca of the USA!
IJH contains 400 of what we call "mid-caps". This consists of companies that are valued between 1.6 and 18.6 BILLION dollars as of 2022. This puts them between the massive companies that are in the "large-cap" space like Amazon, and the smaller companies that make up the "small-cap" space. I know this sound ridiculous, but I love IJH as much as a person can possibly love an exchange traded fund. It's just so damn cool to own some of the companies in it. For me its a sweet spot of some very cool businesses that are doing very interesting things. We are talking about 400 of the best companies in America that you've probably never heard of - check these random ones out:
Cognex - A company that specialises in machine vision technology and hardware to overcome assembly line errors and optimise efficiency. Their stuff looks awesome.
Builders FirstSource - A company that specialises in house framing wood, with the cool thing being that they cut to order and package before sending out. This means that there is much less wood waste on the building site as they can optimise the cuts to get the most planks of wood out of a single tree. It is estimated that this has saved nearly 500,000 trees from being cut down in just the last 3 years.
Graco - They say it best: "We pump peanut butter into your jar and the oil in your car. We glue the soles of your shoes, the glass in your windows and pump the ink onto your bills." I love owning companies like this, you don't know much about them but you can't live without them.
Wolfspeed - The world leader in Silicon Carbide technology for things like electronic vehicles and radar, I have no idea how it works but who wouldn't think that's awesome?
Are these INDIVIDUAL companies great investments? I have no idea, nor do I care, nor do I believe that anyone else knows any better given the efficiency in markets. That's why I own 400 of them. Some will do really well and leave the mid-caps to become large-caps, whereas others will perform poorly and drop down into the small-caps space. When this happens new ones will enter, as there are always 400 companies in IJH.
For us Aussies: IJH invests in USA companies, but is "wrapped" as a what we call an Australian domiciled exchange traded fund (ETF). Importantly this is not hedged to Australian currency. This means that it will go up or down in price based on both the change in value of the underlying companies on the USA stock exchange AND changes in the Australian dollar. This latter point is important to consider in your overall planning, as this can have a big impact on your outcomes. Over a long period of time (20+years) this is likely negligible, as currency changes tend to "washout" and stay within boundaries. For example, the Aussie dollar versus the USA dollar has rarely gone outside of a range between 50c and $1. However, over short timeframes this can have a large impact - which I'll explain in the VGAD section below.
VGAD or VGS: Fancy owning a slice of the biggest companies in the world? You can brag to your friends about owning Louis Vuitton!
VGAD and it's sibling VGS consist of around 1500 of the largest companies from around the world, excluding Australian ones. This makes them one of the most well diversified ETF's you can own, with a huge number of household names. This includes all the ones that come to mind when you think of big companies, such as Amazon, Alphabet (owner of Google and Youtube), Facebook, McDonalds and Tesla. Yep - it's very USA biased with around 2/3rds of the portfolio being USA companies and the remaining 1/3rd being companies like Toyota and Sony (Japan) from other countries. Some of these companies you may not have heard of, but are still huge and cool. Check these ones out:
ASML - a mammoth company (>30,000 employees) that specialises in photolithography, which is essential for the production of semiconductors. Yes, those semiconductors which are worth a fortune and as rare as hens teeth in 2021/2022.
Shopify - the largest platform for e-commerce, if you're buying or selling something on line there's a good chance they are making money from it!
There are heaps of other great companies in this ETF - by definition they have to be great companies or they wouldn't be amongst the largest in the world!
Note on currency exposure/hedging: The Australian currency is often considered a "risk-on" asset as we are tied to commodities (think iron ore exports). So when global recessions hit our dollar often (but not always) goes down relative to the USA dollar. Put simply, if your ETF is currency hedged then you can get the double impact of the Australian dollar going down (reducing the worth of your shares) AND the value of the companies going down (also reducing the worth of your shares!). To put this in perspective during the "Coronacrash" in 2020 the hedged (ie. in Australian dollars) version of the global ex-Australia index (VGAD) dropped around 30% as both the value of the companies AND the Australian dollar went down. By contrast the unhedged (i.e. not in Australian dollars) version of this index (VGS) only dropped around 20% as the drop in value of the companies was offset a bit by the increase in the US dollar versus the Australian dollar.
I own VGAD because I have a lot of other unhedged currency exposure via DJRE and IJH, so want to counter this in the event that the USA market goes down and our currency goes up. This has happened many times in the past, and I prefer caution where possible.
DJRE or REIT: Don't you know that property is the ONLY way to get rich!
The ETF's DJRE (unhedged) and REIT (hedged) provide exposure to real estate investment trusts (REITs - not to be confused with the ETF named REIT...). These are a quirky asset class in that they in many ways are similar to if you bought an investment property yourself. They often use a lot of leverage, and are mandated to pay back to you a large proportion of the income they receive after expenses. This means that they often pay a relatively high dividend yield, so expect a regular, quarterly paycheck from them. That can be good (money in my pocket!) and bad (I have to pay tax on it :(....). REITs are included in other ETFS like VGS/VGAD, IJH and VAS as they are a part of these indexes, however I choose to "overweight" them as I like the potential diversification they provide.
Equity Apartments - Next time someone excitedly tells you about their investment property in Logan that they are renting out for $350 a week you can click on this link to show them the 35 apartment towers that you own a part of in New York. You might recognise some of the names of the places they are in - Manhattan, Park Avenue, The Upper West Side, Wall Street. You can also casually state that some of the 2 bedroom ones you rent out for 10's of thousands of dollars per week, and that they might recognise some of them from shows like Succession or Billions. Or you can just sit there and drink your Vodka (Marcia), Bundy Rum straight no chaser (Claudia) or cistern moonshine (Lily - sorry Lily...) and nod your head as if you care. Or if yuppie apartments in New York are not your thing....how about a boutique, all wood small group of apartments in Saint-Mande Paris that you own as part of Gecina Sa, the France based REIT?
Aedifica - This one is cool. It specialises in environmentally sustainable residential care homes for elderly and disabled people. Check out "Villa Casimir" in the Netherlands at this link, if that doesn't make you feel good about what you own (how awesome does that place look!) and what they are doing with it there's something wrong with you. Imagine visiting your vulnerable loved ones in a place like that, that has to make you feel at least a little better and lift your spirits.
Prologis - One of my favourites, they build warehouses and distribution centres for companies like Amazon. They are the biggest REIT in the world, and their portfolio is very impressive. Fancy an automobile parts manufacturing warehouse in Slovakia? I do!
I own both DJRE and REIT, the former has slightly higher fees but the latter is hedged. Picking which one you want comes down to do you want it to be currency "controlled" (hedged - REIT) or do you want it to fluctuate with changing currency exposure (unhedged - DJRE). Personally I only buy DJRE now, it's quite a large ETF with a lot of money in it so I have no concerns that it will stop existing one day. Either one is a great investment though.
VAS: I know those companies - Aussie Aussie Aussie Oi Oi Oi!
VAS stands for Vanguard Australian Shares, which you guessed it, owns only Australian companies. This means all the ones you know of like BHP, Rio Tinto, Commonwealth Bank, Woolworths, Wesfarmers (owner of Bunnings and Kmart) and CSL. Australian shares have a number of interesting aspects to them, including:
1. In local currency terms they were the 2nd best performing country in the 121 years since 1900, behind only South Africa. BUT - in USA currency terms Australia was number 1!
2. Australian shares have the unique advantage of often providing "franking credits". Long story short this means that when you get a dividend from Australian shares you get the money in your bank AND a tax credit. This means that any tax the company paid you get a credit for. This can be very beneficial as if you take time off work / getting an income you can get reimbursed for any tax the business paid at tax time. This is not trivial, and many retirees rely on it. This is a key reason that Labor lost the 2019 federal election. When they announced that policy I thought it was a killer for them, and it turns out they realised the same thing (just too late!).
Given these advantages why shouldn't you just buy all Australian shares? Because that is putting all your eggs in one basket, which we don't do. Doing well for the last 121 years does not mean Australia will do well in the future, and even if it does there will likely be decades where it performs poorly while other countries do well. That is why I buy parts of everything from everywhere. I think it is not a bad idea at all to have a fair chunk of Australian companies, we have low corruption, good governance and "punch above our weight" with industry. But I wouldn't put all my eggs in that basket.