You already know ETFs are the best possible investment strategy because they marry diversification with low cost. But which of the 40-odd available funds are best to invest in?
We asked investment analysts at Intellidex to list their five favourite funds. All of these are available to invest in through EasyEquities and are eligible for tax-free accounts.
What Intellidex analysts say:
ETFs are a brilliant way to build a core investment portfolio that is low cost and well diversified. Generally they’re better for long-term investing, by which we mean at least three years. ETFs can form a good core of an investment strategy and then if you want to do more adventurous trading, that can be done with a “satellite” portfolio, so ensuring your overall strategy is solid. ETFs are also the only instruments allowed in tax-free savings accounts, so it’s a really good idea to use your TFSA for your core long-term savings, letting the capital gains and dividend flows accumulate and compound within the tax shelter.
We’ve picked five funds representing a few different asset classes that we think are brilliant potential investments. They can be mixed up within a portfolio.
A core portfolio invested in South Africa’s biggest companies.
The NewFunds Swix 40 ETF invests in the 40 biggest companies on the JSE. It has an annualised four-year return of 15.28% and is very reasonably priced (the fund managers charge 0.35% per year – so that’s 35c for every R100 invested). It tracks the Swix 40 index with a low tracking error, another indicator of quality that also means returns are higher than some other similar funds that lag the index slightly. The Swix 40 weights the companies it invests in according to how much of their shares are held by South Africans, so it doesn’t hold much in big foreign companies that happen to be listed on the JSE. The only minor negative is that the weighting approach means that Naspers gets a very large allocation, making up 21% of the fund currently. If that turns you off, the Satrix Divi (see below) is a good alternative.
Get exposed to foreign developed markets and lessen SA risk
The db x World is a great way to protect your investment from the ravages of a weakening rand and poor SA economy. It invests in an index tracking the world’s biggest companies listed on 23 developed market stock exchanges, though the US dominates with almost 60% of the fund. In the portfolio you’ll find household names like Apple, Microsoft and General Electric, among over 1,600 companies. The total expense ratio is 0.68%, so costs will eat up 68c per year of every R100 you have invested per year, but that’s still the cheapest possible way to get international exposure.
Earn some dividends!
Of the two available dividend-focused ETFs, we prefer the Satrix Divi because it is forward looking, based on projected dividends, as opposed to the CoreShares Dividend Aristocrats ETF which is based on historical performance that may not be repeated in future. The Satrix ETF invests in 30 companies – drawn from the 100 largest on the JSE excluding property stocks – with the largest expected dividend yields, as forecast by financial analysts. Going into dividend-paying stocks is a good idea for two reasons. First, the dividends themselves provide a source of good quality cash returns which is important if you are relying on your portfolio for income. Second, dividend-paying stocks are expected to perform well in the long run because their prices are currently low relative to the dividends they pay, qualifying them as “value stocks” which appeal to investors like Warren Buffett. Companies that pay dividends are confident about the future – they don’t need to hold on to cash in case of bad times. The expense ratio is 0.45%, which is pretty reasonable.
Get some exposure outside of equities
Equities are the highest risk financial asset. They generally provide the best returns, but can be volatile so only suit longer-term investors. One way to lessen that risk is to invest in funds that include other asset classes such as bonds and cash. These two funds do that quite neatly, the NewFunds MAPPS Protect ETF and the NewFunds MAPPS Growth ETF. Both are run by Absa. The first is lower risk with 40% invested in equities. The balance is invested in bonds (15%), inflation-linked bonds (35%) and cash (10%). The Growth ETF is more aggressive with 75% in equities, 10% in bonds, 10% in inflation-linked bonds and 5% in cash. The two funds are designed to meet two different risk appetites with Protect for older savers closer to retirement and Growth for younger savers with a long time horizon. Both funds have a stupendously cheap expense ratio of 0.33%, so you can be assured that they are great value for money and make hard choices, like which asset classes to invest in, easy.
How about some property exposure?
Like an investment that’s safe as houses? Property has been a pretty bright part of the JSE in the past few years with a variety of funds and property management companies listed on the exchange. There are a few property-focused ETFs to choose from, but we like the CoreShares PropTRax 10. It invests only in the 10 largest property stocks which we think makes for a better quality universe, excluding some of the smaller “me-too” property funds listed on the exchange. It has outperformed the other funds, boasting a three-year annualised return of 17.1% against 13.9% for the CoreShares SAPY ETF and 12.6% for the Stanlib fund. That return is worth the annual expense ratio of 0.55%, though Stanlib’s expense ratio is cheaper at 0.39%.
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