Suitability: The CoreShares Top50 ETF is ideal for investors with a medium- to long-term investment horizon and can be used as part of your core investment portfolio. This fund invests in the 50 largest blue-chip companies on the JSE. Equity investments tend to exhibit higher short-term volatility than other asset classes, so a longer investment horizon gives a portfolio time for returns to accumulate ahead of volatility.
What it does: The fund tracks the 50 largest JSE-listed companies by float-adjusted market capitalisation. A float adjusted market capitalisation format is based on the market capitalisation of each company (share price multiplied by number of shares in issue) excluding locked-in shares (such as those held by holding companies, founders and governments) and cross holdings (where a listed company, such as Remgro, Reinet or PSG, owns a chunk of another listed company). Constituent weightings are capped at 10% with rebalancing of the portfolio done quarterly. The index is constructed and maintained by S&P Dow Jones Indices.
Advantages: This fund has one distinct advantage over the popular top 40 funds: it caps exposure in a single asset at 10% of the portfolio, which prevents the possibility of a super large company such as BAT or Naspers from dominating. Additionally, it eliminates cross holdings, thus further reducing direct or indirect over-exposure to a single asset. And it consists of the most liquid blue chips on the JSE, some with international operations, which further diversifies risk.
Top holdings: The top 10 assets constitute 59.7% of the fund. The fund itself represents at least 84% of the JSE’s total market capitalisation. As such, it can be viewed as a barometer of the SA equities market.
Risk: It is a 100% investment in equities, which is a riskier asset class than bonds or cash. However, the returns over time should compensate for volatility. Also, constituent companies have diversification benefits because they operate in several jurisdictions and in varied sectors, diminishing the risk to a degree. The risk is also reduced due to the factors mentioned above: capping exposure to 10% in one instrument and eliminating cross-holdings.
Fees
The CoreShares Top50 ETF has a total expense ratio (TER) of 0.2%
Historical performance
The fund is just over a year old.
Fundamental view
The rand’s rebound has induced a significant change to prospects. At the beginning of the year the rand was weakening against major currencies and it looked as if that would continue unabated. We explicitly mentioned in our reviews on similar funds (eg top 40 funds) that they would benefit from their foreign exposures when foreign earnings were translated into rands. Now that the rand is appreciating, the implication is that foreign earnings will be depressed.
This fund’s constituents have significant foreign earnings, but mostly in regions where economic growth is better than SA’s. That will benefit the fund, offsetting consequences of a strengthening rand.
Alternatives
The alternative fund is NewFunds S&P GIVI SA Top 50, offered by Absa. It differs from the CoreShares Top 50 in that its weighting methodology adjusts for perceived intrinsic value.
BACKGROUND: Exchange-traded funds (ETFs)
Exchange-traded funds (ETFs) are passively managed investment funds that track the performance of a basket of pre-determined assets (in this case, resource companies). They are traded the same way as shares and the main difference is that whereas one share gives exposure to one company, an ETF gives exposure to numerous companies in a single transaction. ETFs can be traded through your broker in the same way as shares, say, on the EasyEquities platform. In addition, they qualify for the tax-free savings account, where both capital and income gains accumulate tax free.
Benefits of ETFs
- Gain instant exposure to various underlying shares in one transaction
- They diversify risk because a single ETF holds various shares
- They are cost-effective
- They are liquid – it is usually easy to find a buyer or seller and they trade just like shares
- High transparency through daily published index constituents
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