Suitability: The fund utilises share price momentum, which refers to the trajectory of share prices on the JSE. It invests in the JSE’s 40 largest stocks, but upweights those stocks that are increasing in price and downweights those stocks that have been declining. It backs winners and avoids losers.
Momentum is an investment strategy that has been both advocated and criticised by financial theorists. Some studies show that momentum strategies do outperform the general market over the long run. Generally this is explained by reference to behavioural biases – that investors tend to back winners and avoid losers based on recent price performance, so adding momentum to price movements. On the other hand, momentum investing is criticised as “selling low and buying high” which naturally underperforms. The evidence suggests that the longer the holding period, the more likely the strategy does outperform; however there are shorter periods in which it does not.
So this fund should only be considered by investors with a long-term horizon, or a short-term view that market trends are going to hold for a definitive period during which they will be invested.
What it is: Price momentum investing is buying assets whose prices have been climbing and selling those that have been falling. The fund’s strategy is referred to as “smart beta” because it is different from the usual pure index investing represented by most of the listed ETFs which utilise market cap weightings.
What it does: The Equity Momentum ETF tracks the performance of the Barclays Capital/Absa Capital South Africa Equity Momentum index. It is a total return index which aims to capture returns from the short-term price momentum among the 40 biggest companies on the JSE. Holdings are ranked by their relative price momentum over the assessment period, with the index being rebalanced quarterly. Shares with higher price momentum are given higher weightings and any stocks with negative price momentum are sold off. As such the index usually has fewer than 40 stocks.
Distributions are reinvested in the ETF on an after-tax basis. However, if an investor holds the ETF as part of a tax-free savings account, the dividends will accumulate within the tax-free wrapper.
Advantages: It offers investors an opportunity to earn above-average short-term investment returns provided the observed price momentum persists into the future.
Disadvantages: The major drawback is that investment decisions are not based on the fundamental value of a company but on historical price movements which may not continue into the future.
Top holdings: The top 10 holdings constitute 60.7% of the overall portfolio.
Risk: The fund is constructed based on observing short-term price movements of stocks which may not persist. The fund is susceptible to being overweight in stocks that have had a hard run but investors are about to rotate out of. However, the risk is mitigated by the fact that the asset pool is limited to JSE’s top 40 blue-chip companies, which are always within an investor’s radar.
Fees
The total expense ratio is 0.36%. However, there are additional costs associated with trading the ETF which include bid-ask spreads and brokerage fees.
Historical performance
The fund’s performance depends on the method used to invest. A lump-sum investment mimics the index performance. However, investing through regular instalments usually lags the performance of the index, according to historical evidence, and the pattern is apparent in other ETFs too. The performance described in the table below is for a lump-sum investment.
The fund has generated an annualised return of 10.7% over the past three years. However, the fund has got a relatively high tracking error compared with other listed ETFs.
Fundamental view
History shows that momentum is far more useful during rising markets than falling and flat markets. On average markets rise more often than they fall but we are not convinced momentum is a robust way to construct a portfolio. While recent history can be an indicator of the near future, holding other things constant, it should be noted that investor sentiment drives share prices and sentiment is mostly influenced by current information which may be different from historical information. The price momentum strategy can be beneficial to tactical investing if you have specific views about market trends, but we think it is more useful to determine future prospects of a stock based on fundamental analysis.
Alternatives
There are no other ETFs which follow the proprietary benchmark index created by Absa for its momentum fund. However, there are other smart beta listed ETFs such as: CoreShares Dividend Aristocrats, BGreen ETF and Satrix DIVI.
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