Bought some Vanguard High Growth Diversified Index Fund ETFs on my Comsec Margin Loan account

I've had no net debt owing on two of my three margin loan accounts for several years, but yesterday I decided to purchase $20,000 of VDHG (Vanguard High Growth) ETF using my Comsec Margin Loan account. I had previous had a small positive cash balance sitting in that margin loan account, so overall I'll now have a CSML loan balance of $11,685. The interest rate is currently 5.50%, so I'll be paying about $643 in interest pa, which will be tax deductible (in reality it will offset some of the dividend income produced by my investments).

Over the past three years the average annual total return on VDHG has been 8.42%. Longer performance data isn't available for the ETF, but it should perform in a similar manner to the Vanguard High Growth Index Fund that had an average return of 8.40% over the past three years (to 31 Dec 2020), and has averaged 9.84% pa over the past ten years.

As all distributions that are taxable as income will be offset by tax deductible margin loan interest payments, most of the net return (total return - interest cost) will be in the form of long term capital gains, which would be taxable at half my marginal tax rate due to the CGT discount. And if I don't sell the investment until I 'retire' and have little taxable income (any SMSF pension income will not be taxable income under current tax law when it is in 'pension mode' and I'm over 65) there may be no CGT liability at all.

While I can't know what returns over the coming decade will be (see my previous post regarding why it could be a decade of mediocre returns), there is a reasonable probability that the average total return over the next ten years will be higher than the average interest rate charged on the margin loan. So I have a reasonable chance of making a profit on OPM (Other People's Money).

To put this trade into perspective, I now have total margin loans (and portfolio loan - secured against our home equity) debts of $115,000, while the investments held in those accounts have a current market value of around $235,000. So, even after this latest purchase on margin, the overall LVR across all three margin loan accounts and my portfolio loan account is still under 50% (and most of that debt is on the portfolio loan, which isn't subject to margin calls).

Subscribe to Enough Wealth. Copyright 2006-2020