Suitability: The Satrix 40 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 40 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.
Furthermore, the fund represents at least 80% of the JSE’s total market capitalisation. As such, it can be can be used to gain exposure to South African economic activity.
What it does: The fund tracks the value of the FTSE/JSE Top 40 index. The Satrix 40 exposes investors to the price performance of the FTSE/JSE Top 40 index and pays out, on a quarterly basis, all dividends received, net of costs. In order to reduce costs and minimise tracking error, the Satrix 40 engages in scrip lending activities with Investec and Sanlam. 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 price of the index than that of a smaller company.
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’s not possible to acquire the securities on the index due to a lack of sellers. In such an event the manager may, in the interests 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. And investors can gain exposure to Satrix 40 via the SatrixNow platform which is administered by EasyEquities.
Top holdings: The top 10 assets constitute 63.3% 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 big exposures in heavyweights such as Naspers and SABMiller. 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 40 ETF has a total expense ratio (TER) of 0.44%
Historical performance
This is SA’s first ETF, launched in 2000, and investors from the beginning would have received annualised returns of 15.33%.
Fundamental view
Equities are driven by general economic activity. SA’s economy has performed poorly recently and likewise the equities market has remained largely flat for the past two years.
However, the significant foreign exposures in the fund benefited from the rand’s fast depreciation, but recent rand gains could put foreign translated earnings under pressure. But foreign exposure remains beneficial because it is in regions where economic growth is better than SA’s. That will benefit the fund.
Alternatives
Its closest peers are the Stanlib Top 40 and Ashburton Top 40ETFs. Ashburton’s fund is structured the same as the Satrix 40, but, Stanlib’s weighting is adjusted for free-float. A free-float adjustment 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). Other close peers are Swix-weighted funds – SWIX 40 ETF and Stanlib SWIX ETF – which only consider the free-float market capitalisation of companies that are held on the JSE register. This means companies that are listed on the JSE but mostly traded on other markets such as London are held in a lower proportion.
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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