Performance review
The CoreShares Top50 ETF has delivered returns of 5.7% for the 12 months to end-February. This is a good turnaround from the performance since it was listed in May 2015 which has been -0.8%. The overall JSE market has failed to make meaningful returns since 2014, when it hit its historical high.
Outlook
The top 50 companies on the JSE represent more than 90% of the overall market capitalisation and their performance is driven by general economic activity. Equities have proven their ability to provide investors with growth ahead of other investment classes over long periods. Recent political developments which led to the downgrade of SA’s credit rating to junk status are likely to add pressure to an already struggling economy. Bond yields have already risen and the rand, despite its recent recovery, is still below its levels prior to the firing of Pravin Gordhan as finance minister. However, the significant foreign exposures of the companies held in the fund benefit from rand weakness, and often involve regions where economic growth is faster than SA’s. Internationally, geopolitical uncertainty remains high although the outcome of French elections has eased fears a little. Recently, encouraging economic data have come out of Europe, China and the US.
Suitability:
The CoreShares Top50 ETF is ideal for investors with a medium- to long-term investment horizon and can be used as part of a 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) but excludes 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
Top Holdings: The top 10 assets constitute 57.5% of the fund, with the biggest, Naspers, taking up 10.6%.
Risk: This 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 concentration risk is also reduced because exposure in each asset is capped at 10% (though it can breach that in between the rebalancing dates) and the effects of cross-holdings are eliminated.
Alternatives
A similar fund is the NewFunds S&P GIVI SA Top 50 (total expense ratio: 0.15%) 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. 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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