The flurry of new ETF listings this year is not over. Financial engineering has gripped the world of investing as institutions try to set themselves apart. Ashburton, which has three domestic-focused ETFs, joins the bandwagon by listing its first international ETF which, in a sense, borrows from the fund-of-funds concept: the Ashburton Global 1200 ETF houses various global indices under one fund. So it is a fund containing several other funds.
Unlike most of the international ETFs on the JSE, which invest in a single index, Ashburton Global 1200 ETF combines seven indices: the S&P 500 (US); S&P Europe 350; S&P TOPIX 150 (Japan); S&P/TSX 60 (Canada); S&P/ASX All Australian 50; S&P Asia 50; and S&P Latin America 40. All that for an expected total expense ratio (TER) of 0.45%, which is competitive.
Suitability: This is one of the most diversified funds around, ideal for long-term investors who are concerned about the performance of the South African economy and want to hedge against rand weakness. The portfolio offers exposure to blue-chip companies listed in the world’s most developed economies as well as emerging markets with high growth potential. Most companies have cross-border operations and multi-currency income streams. Investing in this ETF does not affect any exchange control limits as it is rand-settled.
Invest in Ashburton 1200 Quality ETF
What it does: Ashburton Global 1200 ETF tracks the S&P Global 1200 Index, which in turn tracks the seven global indices based on their free-float market capitalisation. The weightings of each index correspond to its relative size in the global equity market.
Top holdings: The fund is well diversified, with only 10.8% occupied by the top 10 counters. It holds a total of 1,219 counters. However, there is concentrated exposure to the US, which accounts for 56.9% of the fund. The next highest country is Japan with just 7.8%.
Risk: The fund is designed to track an equity benchmark so there may be some capital volatility in the short term, although higher returns may be expected from five years or beyond. The performance of the fund will be affected by changes in global economic and market conditions as well as political developments.
How to participate: The initial public offering is closed as it listed on the JSE on 6 October but you can buy or sell the ETF like any other JSE-listed instrument.
Fees: The fund is expected to have a total expense ratio of 0.45%. This would be cheaper than Sygnia’s Itrix MSCI trackers but slightly more than Satrix’s MSCI World ETF (0.35%).
Performance: As with other international ETFs, the returns for South African investors are influenced significantly by the rand exchange rate. In the graph below we show the returns in dollars for the index, as well as rand. Rand returns can be very high when the rand weakens, as in 2015, but when the rand strengthens it can damage returns, as in 2016.
Equities fundamentally derive value from economic performance. However, for South African investors, international funds have an additional return component attributed to foreign exchange movements. Furthermore, the fund’s significant exposure to the US means returns are highly correlated to the US market. US equities are at historical highs but are also looking expensive – the S&P 500 trailing earnings multiple is around 25 times compared with an historical average of 16. The valuations are being buttressed by US President Donald Trump’s proposed tax cuts and infrastructure expenditure plans. If the expectations built into share prices do not pan out, investors could be in for a rude awakening. Overall, however, the ETF offers a well-diversified portfolio, holding more than 1,200 counters with operations that expand across the globe, which sharply reduces its risk levels.
Alternatives: Its two closest peers are the Sygnia Itrix MSCI World ETF (TER: 0.68%) and the Satrix MSCI World ETF (expected TER: 0.35%).
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. 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 or bonds 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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