Following the Brexit vote, the price of the Pound & the Euro fell against the US dollar & the Yen, so I thought this might be a good time to do a screen of British stocks to see whether any bargains might be obtained. I’m weary of the European economy (and Europeans in general) because the popular politics of Europe are focused on social democracy and a highly bureaucratic way of life. So I decided to focus my search for bargains on British stocks.
The first thing to explore is way to purchase British stocks in a discount brokerage account. I could hold an ETF in British stocks on an American exchange, but I’d like to have full exposure to the ups and downs of the exchange rate between the British Pound and the US dollar. I had previously held a “global trading” account with TD Direct Investing in Canada, but after doing some research this morning and calling their helpdesk, it seems this feature has now been discontinued. I guess the next best choice is Interactive Brokers, they definitely offer access to the London Stock Exchange.
Since I’d like to hold my exposure to British stocks directly on the London Stock Exchange, the first thing I did was find an index. The benchmark ETF to use is the iShares Core FTSE 100 ETF. The symbol is ISF. This ETF has a total expense ratio of 0.07% (got to love ETFs :). As the name implies, this ETF holds the 100 individual FTSE 100 stocks. Many of the holdings are familiar to me already as they are global blue chip companies such as HSBC, British American Tobacco, Royal Dutch Shell, BP, Glaxo Smith Kline, Vodafone, etc. This ETF pays distributions quarterly, and has a rolling 12 month distribution yield of 4.64% (based on an annual distribution of 27.47 pence / 5.91 pounds per share.
The first thing that strikes me is the higher dividend yield. Compared to borrowing rates in Canada and the US, the dividend yield in Britain is higher. The dividend yield on the XIU is only 2.94% and the SPY is only 2.62%. I think a simple to manage strategy would be to buy the ISF ETF and then pick a new holding from the index to purchase with the distribution each quarter. On a $500,000 portfolio, this would mean buying a new holding with the 5,000 pounds dividend each quarter.
The tax impact of making this investment might be a bit of an administrative pain in the ass. First, dividends received from British sources would have to be reported in Canadian dollars and tax would need to be paid in Canadian dollars, there is some FX tax risk (for better or worse). There are also some foreign reporting requirements, disclosures need to be made to CRA about foreign holdings. It might make sense to hold these investments in a separate vehicle (a Canadian based corporation).
