Monday, 27 October 2014

Ins and Outs of Managing Your Own Portfolio of REITs

As we mentioned a couple of posts ago when we started looking at Canadian REITs again, it is quite feasible for an investor to build a reasonably diversified portfolio of individual holdings instead of buying an ETF. There are several possible reasons to do this: 1) to save the ETF's fees known as the Management Expense Ratio, which get charged year after year, while the investor pays nothing for direct holdings; 2) to be able to customize the companies and/or weights of the portfolio holdings. There are various factors to consider, pro and con. The factors inter-act and the matter becomes a balancing act. Disclosure: this blogger has been wrestling directly with many of the issues, having taken the step of selling his REIT ETFs in 2013 and buying individual REITs instead at that time.

A minimum allocation to REITs of about $25,000
We don't believe it is worthwhile to start buying individual REITs unless there is a fairly substantial sum available. It's really something to consider for larger portfolios of around $125,000 or more, i.e. 10% to 20% of a total balanced portfolio like the Smart Beta or Swensen Seven). Why so?

Cost, for starters. The 0.39% annual MER of the lowest cost ETF from Vanguard (TSX symbol: VRE) on $25,000 is about $98 per year, which is the same cost as 9 trades at $10 each once a year to keep the portfolio in balance if 9 REITs are individually owned. MER is an unavoidable annual cost in an ETF. On the other hand, the DIY investor holding REITs directly pays a one time initial trading commission and then has the opportunity to control further costs for rebalancing, reinvestment and other purchases or sales.

There is a trade-off between the single trade for an ETF to rebalance with the total portfolio once a year versus the multiple trades for a collection of REITs. Stingy Investor provides a free calculator to compare the cost of owning ETFs versus individual stocks for a whole range of sectors, including the iShares REIT (Symbol: XRE). The tool demonstrates, using the higher 0.6% MER of XRE, that longer holding periods, less frequent trading and larger portfolios favour holding individual REITs over the ETF. Note that the tool's selection box titled Dividend Reinvestment really represents the cost of trading commissions of any kind, whether for reinvestment, rebalancing or purchases/sales of units. Most of the REITs offer a free dividend reinvestment program (DRIP), as our comparison table below shows. For that reason, we suggest entering "1" in the "Dividend Reinvestment" box to represent a single annual rebalancing trade, which is the base case frequency advice for managing a portfolio (see our rebalancing post).

An investor (such as retired person) who intends to simply buy and hold REITs, receiving the cash distributions to spend and not to reinvest, nor to do any rebalancing, in other words to do no trading and therefore not incur any commissions, will save the MER every year. The savings on avoided MER really add up over time as Stingy's tool shows.

Reducing individual company risk to achieve diversification
The more companies held, the less the investor's fortunes, good or bad, are determined by any single REIT. Our table below shows that anywhere from five to eight REITs are required to replicate about 50% of the weight of the three main REIT ETFs. BMO's ETF with symbol ZRE requires more due to its scheme of equally weighting all holdings. 75% replication requires eight (for XRE) to thirteen holdings (for ZRE). For the investor who is only trying to mimic the ETF and isn't trying to assess and select the best REITs (as we took a stab at doing last week with considerable time and effort) we believe the 75% replication level is preferable.

Broader coverage of the various REIT sectors results from more companies and higher replication e.g. with 50% replication the cap-weighted XRE and VRE do not include any apartment REITs like Canadian Apartment Properties (CAR.UN) and Boardwalk (BEI.UN), but at 75% replication they are included.
(click to enlarge image)

The diversification vs cost and complexity trade-off
There is a trade-off - as the number of REITs and diversification rises, which is good, the trading costs and complexity of rebalancing rise too. With more holdings each individual holding is smaller, and rebalancing trades can involve quite small amounts - e.g. a 13-holding equally weighted $25k portfolio mimicking ZRE would hold 100%/13 = 7.7% in each, or $1900 for each one.

On top of that, a $1900 holding yielding 6% annually, or 0.5% on the monthly basis that all the REITs use for payout frequency, gives only $9.50 per month, which is insufficient to buy a single share unit of all but one of the REITs. Thus, too many REITs with too small a monthly distribution means being unable to take advantage of the commission-free DRIP. At prevailing yields and unit share prices, it takes a holding of around $6000 to receive enough to buy at least one share on the monthly DRIP. That's another reason we think the minimum overall REIT allocation needs to be at least $25,000. Of course, investors who merely want to receive and spend the distributions need not worry about missing out on the free DRIP.

Strategy for company selection and weighting - cap-weighted or equal weight, or maybe one's own?
It is important to have a strategy, otherwise you will not manage the portfolio, it will manage you.

Cap-weighting is the traditional standard method and requires the least effort to manage. It is only necessary to swap in or out the lowest weight REIT holding every year, or on whatever rebalancing schedule is chosen. For instance, cap-weighted XRE is reviewed quarterly by iShares but a less frequent semi-annual or annual trade would likely suffice. We do have a concern about cap-weighting - too much concentration. The largest holding RioCan is already a hefty 19% in XRE and adjusting its weight in proportion for only eight holdings boosts that to 26% (see table above for weights and dollar amounts of each REIT for 75% replication of XRE).

Equal weighting spreads company risk evenly but more stocks are needed to reproduce the same proportion of the ZRE ETF that has adopted that strategy. The biggest challenge with equal weighting is deciding how often to do rebalancing trades. As soon as they are purchased the REITs' market prices start heading in opposite directions. Quarterly rebalancing is too often. Even ZRE only rebalances twice a year. We feel that annual rebalancing is sufficient for the individual investor, a trade-off between accuracy, cost and effort.

As DIY investors we can of course do whatever we want. We can select the best looking stocks with methods such as we used in our post last week on the individual REITs. We decided that Artis REIT fell into the less attractive group because it had net losses in two of the last five years, yet mechanically taking the top holdings of ZRE would see it included in a 75% replication portfolio. Deciding to drop it or include it or any other becomes a challenge of stock selection. As investors we would therefore be obliged to become analysts, with the extra time and effort initially and on-going, as well as the uncertain success such an approach entails.

Flexibility to take advantage of DRIPs, discounts, SPPs, tax loss selling
The DIY investor in the process of building up investments can also focus his/her portfolio on REITs with worthwhile additional features. The majority of the big REITs offer plans to reinvest distributions in additional units for no cost (called a DRIP - Dividend ReInvestment Plan). One that does not is Boardwalk.

Some offer attractive cash discounts on the purchase of DRIP units, such as RioCan, H&R, Canadian Real Estate REIT and Calloway. Yet others offer plans that give bonus units when the investor DRIPs, though the size of holding required to get even one share at a discount can be very substantial, as our table below shows. ETFs do not participate in the REITs' DRIP discount or bonus plans - the ETFs' DRIPs merely buy shares on the market. An ETF REIT investor therefore loses that benefit.

Many of the big REITs also offer Stock Purchase Plans (SPP), which allow the investor to periodically buy more units for no commission. Canadian DRIP maintains handy lists of all the DRIP and SPP details, like SPP minimum purchase amounts and allowed frequency of extra purchases. The following table summarizes the DRIP and SPP offerings of the top REITs.
(click to enlarge)

Investors holding REITs in taxable accounts can also more easily take advantage of tax loss selling (see our post on this topic) when holding a number of individual REITs. Chances are, some REIT will have a price decline even when the sector is swinging up. A downside is that there is a multiplication of book-keeping required for multiple individual REITs versus an ETF in a taxable account. All the REITs distribute a lot of Return of Capital (ROC), which is not taxable in the year of receipt, being in effect deferred capital gains. On-going yearly ROC means careful time and effort to properly track Adjusted Cost Base (ACB; see also our ever-popular post on ROC). It may be worthwhile to use a pay service such as ACB Tracking Inc to help do it correctly.

Psychological challenge of on-going portfolio management
Managing a portfolio is not just mechanical effort. There is considerable effort of discipline, both to not do anything or to actually go ahead and do whatever one's intended strategy requires. The stock market is good at inducing mind tricks - "Yes, I know my strategy is to rebalance to equal weights per the ETF now but this REIT has had several bad quarters, its price is way down and the analyst commentary and recommendations are negative. Should I not sell out and buy another REIT instead of buying more? Besides, it's only a few hundred dollars rebalancing amount, it isn't worth the commission." Before we know it, our own strategy rules are not fixed but arbitrary.

Bottom line: Buying and holding a portfolio of individual REITs instead of an ETF offers the potential for appreciable cost savings and flexibility for those with at least $25k to invest in REITs. However, it requires extra time, effort and discipline.

Disclaimer: This post is my opinion only and should not be construed as investment advice. Readers should be aware that the above comparisons are not an investment recommendation. They rest on other sources, whose accuracy is not guaranteed and the article may not interpret such results correctly. Do your homework before making any decisions and consider consulting a professional advisor.

Friday, 17 October 2014

Canadian REITs - Which look good, which don't

Last week's post concluded by noting that the continued success of Canadian REIT ETFs from iShares and Vanguard depend a lot on two of their heavyweight holdings - RioCan and Boardwalk. This week, we'll drill down into these and other REITs, or similar real estate corporations, to see if they look attractive. We take the point of view of an investor looking for steady, high sustainable income and not, for instance, seeking under-valued turn-around candidates.

Safety first - Financial stability
The ability to keep paying distributions, especially higher rates, arises from a very solid financial foundation, notably:
  • Strong, consistent profitability - We looked at the net income performance of the last five years, favouring those REITs who always made money and downgrading the others. One REIT, Northwest Healthcare Properties REIT (TSX symbol: NWH.UN), did fine for four years up to 2013 but has faltered in recent months.
  • Track record aka proven management and size - A longer successful history means management and the internal processes of a REIT are more probably solid. One slightly worrying sign at RioCan is the resignation on October 2nd of the President and CEO Fredric Waks for the reason often given when it is not a happy departure - "... to pursue other interests". A larger portfolio of properties provides more internal diversification. We have thus eliminated REITs whose market cap is below $350 million (which excludes none of the REITs held by any of the three big ETFs). Also eliminated were a couple of REITs tied to one retailer - Canadian Tire for CT REIT (TSX:CRT.UN) and Loblaws for Choice Properties (TSX: CHP.UN).
  • Limited debt - The classic 2004 guide to REITs from Deloitte (still available as a free download from Investor Village) notes that 40 to 60% debt on the balance sheet is a desirable conservative range. We put aside those REITs above that range, shown as a Debt/Equity ratio above 1.5 in our table below (40% debt = D/E 0.67)
  • Business sector - REITs operate in various sectors, from hotels to office buildings. Some sectors are more vulnerable to economic swings, most particularly hotels. The most stable are apartments and seniors homes. In between are retail, office and industrial.
Sustainability of distributions
REITs should not pay out more cash than what is needed to maintain the assets and the business, as a minimum, or to undertake expansion that will grow distributions, as a more ambitious goal. The commonly used metric to gauge how much is Adjusted Funds From Operations (AFFO), which CREIT (TSX: REF.UN) describes as "... a measure of operating cash flow generated from the business, after providing for all operating capital requirements". Taking the actual distribution as a percentage of AFFO the maximum advisable rule of thumb (per the Deloitte Guide) is a 95% payout ratio. A couple of REITs, Pure Industrial (TSX: AAR.UN) at 101.1% and Crombie (CRR.UN) at 98.3%, exceed the target. RioCan is right on the line at 95.3%.

Growth in distributions, actual historical and potential future
A track record of growing distributions by a REIT is a good thing, the converse of no growth or reduced distributions being bad of course. The one-year and five-year growth records show what the REITs have delivered to investors. The better-performing REITs levitate towards the preferred upper part of the table.

Growing AFFO, low payout and low debt/equity show a greater capacity and potential for future distribution increases. The REITs in the top of the table show favourable combinations of these elements.

Interest rate effects - The benchmark against which REIT payouts are compared is the Government of Canada 10 year maturity bond. Currently, the GOC10 yields 1.95% (see Y Charts), though it can only be purchased by an individual investor for around 1.77% yield (the broker takes a cut). Is it enough compared to the yields in our table below, or other fixed income investments (see our post a few weeks back comparing best fixed income rates)? It's up to us individually to decide.

One other factor we investors need to keep in mind is that REIT prices will decline should interest rates rise. Last year, CIBC's REIT review estimated that REIT prices would fall about 12% for every 1% rise in GOC10 rates. Another review from Dundee Capital Markets in the Globe and Mail pegged the sensitivity at 13:1. In reality, after the approximate 1% rise in interest rates in 2013, REITs fell 16% on average.

Bottom line: 15 REITs we like - top half of the table - and 13 we don't like - in the bottom half.
(click to enlarge image)

There is a wide range of yields on offer from:
-  a low of 2.9% from Boardwalk (TSX: BEI.UN), which displays a high degree of safety plus past and potential growth, to
- a high of 8.5% from Dream Global (DRG.UN), a smaller, more levered, less established, portfolio in a more economically sensitive sector i.e. riskier player.

Disclaimer: This post is my opinion only and should not be construed as investment advice. Readers should be aware that the above comparisons are not an investment recommendation. They rest on other sources, whose accuracy is not guaranteed and the article may not interpret such results correctly. Do your homework before making any decisions and consider consulting a professional advisor.

Tuesday, 14 October 2014

Canadian Real Estate ETFs - Which is best?

REITs are a basic component of most diversified portfolios. We first looked at the basic characteristics of investing in real estate trusts and funds in 2010, with updates in March 2011 and in December 2013 after Vanguard Canada launched its REIT ETF in November 2012. A bare month ago in September, First Asset entered the market with its ETF, joining well-established competitor funds from iShares and BMO. Let's do another update to see which is the best ETF and to see how the sector has been doing.

We've compiled the comparison table below to compare the ETFs and their characteristics. Data was obtained from GlobeInvestor's My WatchList, TMX Money and Morningstar Canada, as well as from the provider websites.
(click to enlarge image)

What are the key points arising from the table?

First Asset's Active Canadian REIT ETF (TSX symbol: FRF) is an unknown - There is very little hard data about FRF. There is no track record, of course. But there is also little visibility into the portfolio. The entire portfolio is not revealed, only the top ten of 32 holdings. The fact that it is actively managed fund means that the fortunes of investors in FRF will depend largely on the skill of manager Lee Goldman in attaining the objective of "... regular income and long-term capital appreciation". One thing that is quite likely are higher trading expenses, as a result of the active management. This in turn is likely to push the management expense ratio (MER) a greater degree above the management fee than FRF's passively managed competitors.

Similar portfolios - There is a high degree of similarity between the other three ETFs, especially between that of iShares (stock symbol: XRE) and Vanguard (VRE). The number of holdings is almost the same, as is the average size of companies, their P/E and P/B ratios, the largest stock and its weight (inevitable given that they both weight holdings by market cap). Our other table below shows in detail the high degree of overlap between the holdings of XRE and VRE.
(click to enlarge) 

BMO's ZRE is also fairly similar with a high degree of holdings overlap. But ZRE weights holdings equally, resulting in much less concentration in one stock - Riocan is only around 6% of ZRE versus the 18/19% it represents in XRE and VRE. We consider the lower concentration risk to be a plus for ZRE.

Similar distribution safety - In consequence, XRE, ZRE and VRE all exhibit similarity in several data points that inform us about the likelihood of continued high distribution yields by the under-lying holdings and thus of the funds themselves:
1) the number of holdings with either no dividend increase or a cut in the past five years - about a third of holdings in each ETF;
2) the number of holdings with a very high dividend yield of over 7% - again all in the 20's percentages;
3) the number of holdings whose ratio of dividend payout to earnings is in excess of a 90% danger zone - between 11 and 20% for the three.

Similar multi-year returns for XRE and ZRE - Despite the different weighting schemes, XRE and ZRE, the funds with the longest history, have amazingly similar returns and volatility. Both have also lagged the TSX benchmark stock fund (iShares' S&P / TSX 60 Index ETF, symbol: XIU) over the past three years.

Encouragingly, after a big dip in 2013 when interest rates took a blip upwards, returns have been positive again recently as interest rates again moderated. Every single holding in all of the ETFs has had a positive total return over the past year.

VRE's management expense ratio advantage - One significant difference between the ETFs is VRE's expense ratio, which is 0.2% or more lower than the others'. All else being equal, which does seem to be quite the case per the above, a lower MER leaves more money for the investor, year-in, year-out. Vanguard's cost simulator shows that the MER difference constitutes a significant long term advantage if the funds achieve the same long term return from holdings.

Distribution smoothing and yield: differences more of optics than of substance - ZRE pays out the same smooth amount of cash every month (currently $0.083 per unit). Meanwhile, XRE typically has paid the same amount for several months at a time, then it changes up or down, and VRE pays an erratically varying amount every month.

That smoothness of ZRE's distribution is not because the underlying holdings produce such steady income. As we've seen above, the holdings are pretty much the same as XRE's and VRE's. The difference arises only because BMO managers have decided to pay out a steady amount to suit investors who look at REIT funds as income generators.

All the ETFs, in order to maintain their internal non-taxable status and allow all income to be taxed in investors' hands, must distribute all their income in any calendar year. Within the year, whether it is paid out evenly each month, or in gyrating amounts, doesn't matter. The choice to smooth the income can result in some return of capital (ROC) to the investor if BMO mis-estimates the yearly income and pays out too much (that might be a bit of bad ROC but we have to remember also that good ROC can consist of unrealized capital gains or index-mimicing distributions - see our post on Good and Bad ROC, and this post in 2013 which discussed XRE and ZRE's ROC performance). The key point is that both XRE and ZRE have had returns, a sum of income received from holdings and their capital gains, that have consistently exceeded what they have distributed annually. So, though both have given out ROC, they are OK.

The other non-issue is Vanguard's consistently lower distribution yield. Read some excellent, simple explanations of how this comes about by Canadian Capitalist or Canadian Couch Potato or in one of Vanguard's FAQs. Vanguard's VRE portfolio is generating the income - see the blue bordered cells in the table that show the low trailing distribution yield of 1.8% along with the 5.4% yield of the portfolio holdings. The income is being distributed by the ETF, it's just that as the ETF grows, the investor benefits from capital gains instead of cash income.

For investors who are not withdrawing but building up assets and reinvesting distributions, the building up of capital gains in VRE's Net Asset Value can even be a convenience, though all the ETFs offer a free automated dividend/distribution reinvestment program (DRIP) which can accomplish more or less the same thing.

Real estate a good diversifier in a portfolio - Some investors look at the high distribution yield for income as the main benefit of REIT ETFs. But long term investors, who follow the strategy of rebalancing to a fixed asset allocation (see our Rebalancing what, why and how and model portfolios we have suggested - Simple, Swensen Seven, Smart Beta), look to the diversification benefits of REIT ETFs. The data is accumulating with time and it reinforces the notion that REITs provide diversification benefit by virtue of providing positive returns that are uncorrelated with other asset classes.

We can see this by using's calculator to find that XRE (enter the symbol XRE.TO) over the past twelve years has a 0.53 correlation with XIU (enter XIU.TO) and a -0.05 correlation with XBB (enter XBB.TO), the iShares broad Canadian bond ETF. The numbers vary somewhat for different time periods but XRE has had consistently low correlation with XIU and XBB i.e. away from the 1.0 mark which indicates the complete perfect correlation that we do not want. By contrast, XIU's correlation with US equities, as represented by the S&P 500 (SPY) in InvestSpy, has been 0.7 or higher all along.

Bottom line: It's a trade-off between the lower concentration risk of BMO's ZRE and the appreciably lower MER of Vanguard's VRE. We tend to favour the certain benefit of the lower MER, but all depends on the continuation of at least reasonable performance of big holdings Riocan and H&R.

Next week, we'll therefore look at the health of the individual REITs. Readers will also have noticed that the ETFs don't have many holdings and even a fairly small individual investor could buy all or most of the REITs in the ETFs themselves and save any MER entirely. In two weeks, we'll examine the considerations involved in managing a portfolio of REITs.

Disclosure: This blogger owns REITs, but only shares of individual REITs, and none of the ETFs mentioned above.

Disclaimer: This post is my opinion only and should not be construed as investment advice. Readers should be aware that the above comparisons are not an investment recommendation. They rest on other sources, whose accuracy is not guaranteed and the article may not interpret such results correctly. Do your homework before making any decisions and consider consulting a professional advisor.

Wednesday, 8 October 2014

ETF Liquidity Risk - What's real, What's hype, What to do

A few days ago, deputy governor of the Bank of Canada Carolyn Wilkins voiced concerns about ETF liquidity, a repetition of those raised in 2011 by the Financial Stability Board and by the Bank for International Settlements. She made the provocative statement that there is an "illusion of liquidity" with certain ETFs, using as an example those ETFs holding high-yield bonds. The concern is that ordinary investors could be caught in the cross-fire when interest rates start to rise, triggering large redemptions of ETF holdings and causing a crisis by the disappearance of liquidity (the ability to quickly and cheaply buy or sell without significantly affecting market price). No one wants the nasty surprise that a supposedly easily-traded ETF suddenly cannot be sold. But various ETF providers and industry participants reacted strongly to Wilkins in a Financial Post article, saying ETFs do not cause or create additional liquidity, nor additional risk. Who's right, what is the reality for ordinary investors and what can we do before a crisis hits to avoid investment pain?

Hype: ETFs create, or are exposed to, additional risks and problems
As researchers at the EDHEC-Risk Institute dissected in 70 pages of detail in a 2012 analysis, ETFs are not more, and in some ways less susceptible, to liquidity problems than mutual funds. The EDHEC authors don't mince their words about the FSB and BIC documents, calling their concerns "vague, highly tentative and hardly ever based on facts ...".

Reality: The real liquidity risk arises from the under-lying assets.
The old expression that one cannot turn a sow's ear into a silk purse applies. High-yield corporate bonds are less liquid, less easily tradable, than government bonds. That's a fact that doesn't change no matter whether it's an ETF or a mutual fund holding them. Institutional investors, those who might be wanting to sell the huge blocks of shares that might stress the market and cause a liquidity crisis, know this already. The only people who might be under an illusion of liquidity are us, less-informed retail investors.

The possible illusion is that trading volume may be mistaken for liquidity. Some ETFs, like the most popular US-based high-yield bond ETF, the iBoxx $ High Yield Corporate Bond ETF (NYSE: HYG) with $12.4 billion in assets, trades a very large $441 million per day on average. Yet it is much less liquid, especially in a crisis when US government securities are the safe haven, than the tiny by comparison Vanguard Short-term Government Bond Fund (NYSE: VGSH) with $505.8 in assets, which trades an average $6 million per day.

The reason the much higher liquidity of VGSH happens, that it would be easy even to trade large blocks of shares, is the presence of market makers and authorized participants who can create or redeem new shares of the ETF at will from the huge readily available supply of government T-bills and bonds. explains how and why the mechanisms work in a series of short, informative articles What is the Creation / Redemption Mechanism?, Understanding ETF Liquidity and Understanding Spreads and Volume.

Assessing ETF liquidity - has a very handy tab labelled "Tradability" in the detail it provides for every US-traded ETF (unfortunately, it does not cover Canadian-trade ETFs), e.g. this page for HYG. The tradability of HYG is only a weak 75 out of 100, while VGSH's is 100. So it is true investors need to be wary of the liquidity of high-yield bond ETFs, just not for the reason Wilkins cites. Ironically, apparently (see Liquidity crunch in bonds hits ETFs, raises risk in ETF Insight) part of the reason for the low liquidity of such bonds is the action of government regulators attempting to reduce the riskiness of investment bankers, which has drastically reduced the ready market supply of bonds.

Typing in the ticker symbols of a number of ETFs into gives us a pretty good idea of the liquidity of various asset classes:
  • US large cap stocks - SPDR S&P 500 ETF (NYSE: SPY): 99
  • US total market equity - Vanguard Total Stock Market ETF (NYSE: VTI): 100 
  • US total bond market - Vanguard Total Bond Market ETF (NYSE: BND): 91
  • Emerging markets equity - Vanguard FTSE Emerging Markets (NYSE: VWO): 83
  • Developed markets equity - iShares MSCI EAFE ETF (NYSE): 90 
Though Canadian-traded ETFs are not tracked in and there is no comparable source in Canada, the above help us figure out the liquidity for Canadian ETFs that track the same under-lying securities, which is what matters most.

There is even a US-traded ETF for total market Canadian equities:
  • iShares MSCI Canada ETF (NYSE: EWC): 97
EWC would be similar to Canadian ETFs like iShares' XIC (trading symbol on TSX), BMO's ZCN and Vanguard Canada's ECN.

The Canadian ETF iShares U.S. High Yield Bond Index ETF (CAD-Hedged, TSX symbol XHY) tracks the same index as, and would thus have similar liquidity to, HYG.

Liquidity does not equate to volatility or risk - It is important to remember that though liquidity is one aspect of overall risk (and it is always mentioned in any ETF's prospectus as one of many risks), more-or-less equally highly-liquid VTI is still a lot more volatile than VGSH as this Yahoo Finance chart of the ETFs' prices shows. The day to day price of VGSH is a virtual flat line.
(click to enlarge image)

For HYG default risk would be a key concern, as we discussed in this post about default rates. Only a small sliver of HYG's holdings are safer investment grade (BBB or better) per the iShares holdings breakdown of credit quality. Should interest rates rise in any appreciable fashion, not only will HYG's price fall in the usual fashion that sees bond prices and interest rates go in opposite directions, it may put financial pressure on the borrowers and a rise in default rates within HYG's holdings. Liquidity may well be a lesser concern for HYG investors.

Disclaimer: This post is my opinion only and should not be construed as investment advice. Readers should be aware that the above comparisons are not an investment recommendation. They rest on other sources, whose accuracy is not guaranteed and the article may not interpret such results correctly. Do your homework before making any decisions and consider consulting a professional advisor.