Catch this insight by Intellidex on the NewFunds Equity Momentum ETF. The NewFunds Equity Momentum ETF aims to pick stocks that have upward momentum: a steady increase in share prices. This fund should be considered by investors with a stomach for risk and have a long-term investment horizon.
Intellidex Insight: The NewFunds Equity Momentum ETF aims to pick stocks that have upward momentum: a steady increase in share prices. It takes short-term positions in stocks that are rising and sells them as soon as they show signs of going down. While we are not big fans of technical techniques for picking stocks, this approach has been empirically proven in several international and local studies.
The NewFunds Equity Momentum ETF is a solid instrument for investors seeking to tilt their portfolios towards recent winners. It uses a standard investment strategy that is well grounded in academic literature. By selecting stocks based on their 12-month holding period returns and then weighting them according to their contribution to risk, the ETF effectively favours counters with a smooth upward-trending price graph, which helps lower portfolio volatility. However, given its small basket of stocks, it is prone to making large sector bets, which is bad for diversification. The fund’s frequent rebalancing also results in a hefty cost burden – its total expense ratio of 0.51% is among the highest on the JSE list of smart beta dividend-paying ETFs.
Fund description: The NewFunds Equity Momentum ETF initially tracked the performance of the Barclays/Absa South Africa Equity Momentum Index but changed to the Risk-Controlled WITS SA-Momentum Index. The fund’s objective is to capture returns from short-term momentum in the largest stocks on the JSE.
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NewFunds Equity Momentum ETF
Fund Holdings: While the ETF holds the potential of sector concentration, the fund is currently well diversified because no one sector on the JSE is really outperforming.
Suitability: This fund should be considered by investors with a stomach for risk and have a long-term investment horizon.
Historical performance: The NewFunds Equity Momentum ETF’s historical performance is impressive, particularly its one-year performance of 32.3%, outperforming the All Share Index.
Fundamentals: History shows that a momentum strategy is far more useful during rising markets than falling or flat ones. 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 prospects of a stock based on fundamental analysis
Overall, prospects for SA equities are mixed. Companies with international exposures are in a better position than those which derive a lot of their income locally. A positive trend internationally is the easing of monetary policies to buttress the slowing global economy. However, geopolitical tensions are increasing while the US-China trade relations are a constant cause for concern. SA-facing counters are unlikely to provide strong returns in the short- to-medium term given the dire state of the economy. The fund’s advantage is that it continuously moves its assets towards whichever sectors are doing well.
Alternatives: There are no direct peers
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NewFunds Equity Momentum ETF Fact Sheet
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 Easy Equities 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