Suitability: This week we take a look at another of the JSE’s large-cap tracking funds, the Satrix Swix 40 ETF. The fund is ideal for investors with a medium- to long-term investment horizon and can be used as part of a core investment portfolio. It is an inexpensive way to invest in the 40 largest blue-chip companies on the JSE, which represent at least 80% of the JSE’s total market capitalisation. 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 value of the FTSE/JSE Swix Top 40 index. The Satrix Swix 40 fund exposes investors to the price performance of the FTSE/JSE Swix Top 40 index and pays out, on a quarterly basis, all dividends received, net of costs. Constituent companies are weighted according to market value, which means the price movement of a larger constituent company will have a larger effect on the value of the index than that of a smaller company. However, this index differs from the standard top 40 index in that it only considers the market capitalisation of companies that are held on the JSE register. By considering the JSE register only, it means that dual-listed stocks are down-weighted because a significant portion of their shares are held offshore. In order to reduce costs and minimise tracking error, the Satrix Swix 40 engages in scrip lending activities with Investec and Sanlam.
Although this is a passive investment vehicle in that it tracks a pre-determined index, the fund can engage in alternative investing under abnormal market circumstances. For example, if there is a liquidity problem and it is not possible to acquire the securities on the index due to a lack of sellers, the manager may, in the interest of minimising costs, employ the use of derivatives to mimic the index performance.
Advantages: The fund invests in the most liquid blue chips on the JSE, some with international operations, which enhances risk diversification. Investors can gain exposure to Satrix Swix via the SatrixNow platform, which is administered by EasyEquities.
Top holdings: The top 10 assets constitute 60.8% of the fund.
Risk: In addition to being a 100% investment in equities – which is a riskier asset class than bonds or cash – its weighting methodology introduces idiosyncratic risk due to its big exposure in Naspers. 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.
Fees
The Satrix Swix 40 ETF has a total expense ratio (TER) of 0.45%
Historical performance
Fundamental view
Equity prices are driven by general economic activity. SA’s economy has performed poorly recently and likewise the JSE large-cap stocks have remained largely flat. However, significant foreign exposure provides support because it is in regions where economic growth is better than SA’s. And non-rand earnings are a natural hedge against rand weakness.
Swix-weighted funds tend to reduce exposure to resources and basic materials compared with a standard weighting. As South African investors, we are inevitably exposed to the SA economy, which derives a lot value from mining activities. So having an investment portfolio with a lower exposure to resources means our returns are less correlated with things that can go wrong outside of our investment portfolios.
Alternatives
Its closest peers are the NewFunds Swix 40 and Stanlib Swix ETF. Other non-Swix ETFs which track the JSE’s top 40 companies are Stanlib Top 40 and Ashburton Top 40.
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
Disclaimer
This research report was issued by Intellidex (Pty) Ltd. Intellidex aims to deliver impartial and objective assessments of securities, companies or other subjects. This document is issued for information purposes only and is not an offer to purchase or sell investments or related financial instruments. Individuals should undertake their own analysis and/or seek professional advice based on their specific needs before purchasing or selling investments. The information contained in this report is based on sources that Intellidex believes to be reliable, but Intellidex makes no representations or warranties regarding the completeness, accuracy or reliability of any information, facts, estimates, forecasts or opinions contained in this document. The information, opinions, estimates, assumptions, target prices and forecasts could change at any time without prior notice. Intellidex is under no obligation to inform any recipient of this document of any such changes. Intellidex, its directors, officers, staff, agents or associates shall have no liability for any loss or damage of any nature arising from the use of this document.
Remuneration
The opinions or recommendations contained in this report represent the true views of the analyst(s) responsible for preparing the report. The analyst’s remuneration is not affected by the opinions or recommendations contained in this report, although his/her remuneration may be affected by the overall quality of their research, feedback from clients and the financial performance of Intellidex (Pty) Ltd.
Intellidex staff may hold positions in financial instruments or derivatives thereof which are discussed in this document. Trades by staff are subject to Intellidex’s code of conduct which can be obtained by emailing mail@intellidex.coza.
Intellidex may also have, or be seeking to have, a consulting or other professional relationship with the companies mentioned in this report.