6 ETF Picks for August

Intellidex ETF Picks

August headwinds, What, August headwinds? Intellidex is back with six ETF picks to combat the market uncertainty and kick-start your portfolio.

Here are the Intellidex top Equity ETF picks:

Domestic Equity

Absa NewFunds Value (NFEVAL) and Satrix Momentum (STXMMT)

While global development institutions such as the IMF and World Bank are not expecting a recession this year or in the medium term, indicators such as household spending are pointing towards a slowdown. It is essential for investors to position their portfolios for tough economic times. In this regard, our pick is the NewFunds Value Equity ETF (+4%). The fund provides investors with diversified exposure to 30 highly liquid stocks that exhibit value characteristics with reasonable market value. The ETF holds a sizeable portion of healthcare, financials, and consumer goods. In the current economic climate of rising interest rates, financials are expected to perform reasonably well. These institutions have massive cash holdings due to customer balances and business activities. As such, increases in interest rates directly increase the yield on this cash, and the returns supplement earnings. The public healthcare sector in SA is dire, which adds to the appeal of private sector healthcare stocks as a defensive play in these tough times. RH Bophelo, a pan-African investment company that focuses solely on healthcare, estimates that the private sector accounts for 50% of total healthcare spending although the government provides healthcare for 80% of the population. The fund has a total investment cost (TIC) of 0.77%. The July uptick in the S&P 500, Nasdaq 100, and JSE signify that the stock market is beginning to ignore the noise of global inflation fears and slow growth. This brings us to our second pick which is the Satrix Momentum ETF (+2.7%) whose mandate is to capture the return of the equity market enhanced by the momentum risk premium. The portfolio is tilted towards stocks that display positive momentum characteristics and away from negative momentum characteristics. The fund is costly though, with a TIC of 1.05%.

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Foreign Equity:

Sygnia Itrix MSCI Emerging Markets 50 (SYGEMF) and Satrix MSCI Emerging Markets Feeder (STXESG)

In line with our picks from last month, we still favor emerging markets. Despite lingering headwinds, Lazard Asset Management is of the view that China’s growth trajectory is still likely to recover in the final quarter of 2022. Moreover, they believe that emerging markets are in a solid position given the higher commodity prices and improved terms of trade for commodity-exporting countries. Our first pick for offshore exposure is the Sygnia Itrix MSCI Emerging Markets 50 ETF (-0.5%). The ETF aims to provide exposure to investors who seek long-term capital appreciation. While the underlying index is highly correlated with the MSCI Emerging Markets Index, it is composed of 50 carefully selected constituents. The heavyweights of the fund are companies in the tech space such as Taiwan Semiconductor Manufacturing, Tencent Holdings, and Alibaba Group. These three stocks have lost more than 20% in their share price year-to-date. The downside of holding huge portions of large tech companies is that they are likely to drag down the index in times of turmoil. The fund’s net assets amount to R2.1bn, which suggests that it can withstand large withdrawals or survive a bear market. The MSCI EM index outperformed the MSCI World Index in the second quarter as it finished down 11% compared to -16% for the MSCI World. The fund’s TIC of 0.47% is reasonable for an ETF with foreign exposure. Our second pick which incorporates the theme of environmental, social, and governance investing is the Satrix MSCI World ESG Enhanced Feeder ETF (+10.2%). The underlying index measures the performance of developed market companies and screens out controversial business areas while placing greater weighting on companies with higher ESG scores. The fund has a large holding in the tech, financials, and healthcare sectors, all of which played a pivotal role in assisting the world to navigate through the pandemic. Most of the companies that are included in the fund are domiciled in the US and have global footprints. Further to this, they have solid balance sheets with large cash holdings. With a TIC of 0.49%, the fund is relatively inexpensive to hold.

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Bonds, Cash, and Dividends:

Satrix SA Bond ETF (STXGOV) and Satrix Divi Plus ETF (STXDIV)

Our income pick for this month is the Satrix SA Bond ETF (+2.4%), whose mandate is to track the value of the S&P South Africa Sovereign Bond ETF 1+ Year Index. The R186 bond, to which the fund has the largest exposure, is arguably one of the most popular bonds from the National Treasury. While the SA government is highly indebted and will continue to face challenges in the rising interest rate environment, it has a relatively low risk of default. This is confirmed by rating agencies S&P and Moody’s who place the country on three and two notches below investment grade, respectively. Generally, bonds have diversification benefits as they typically are less volatile and have a low correlation with equities. The ETF has a TIC of 0.50%.

On dividends, we have picked the Satrix Divi Plus ETF (+0.3%), which provides investors with the price performance of the FTSE/JSE Dividend Plus Index as well as pays out, on a quarterly basis, all dividends received from companies comprising the index, net of cost. The ETF has a net asset value of R2.1bn, suggesting that it can withstand tough economic conditions. Exxaro, Kumba, and Royal Bafokeng form a significant portion of the fund. These companies have been paying handsome dividends since 2016, however, commodities operate in cycles and past performance does not indicate future performance. The World Platinum Investment Council expects commodity prices to hold firm until global uncertainty subsides. Moreover, local asset manager Anchor Capital, expects specific commodities such as copper to be in high demand as the world transitions towards a greener economy.

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Outlook

Internationally, inflation is likely to remain elevated in the medium term. The global trend of restrictive monetary policy is likely to remain until inflation is a thing of the past. In terms of asset allocation, investors will be keen on stocks that profit from the rising interest rate environment. Banks, insurers, and other financial services firms tend to gain from interest rate increases. Precious metals such as gold act as a safe haven for investors in times of uncertainty.

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Background: Exchange-traded funds (ETFs)