Catch this insight by Intellidex on the NewFunds Shari’ah Top 40 ETF. The NewFunds Shari’ah Top 40 ETF uses an ethical investment philosophy and is suitable for long-term, risk-tolerant investors. Specifically, it appeals to investors seeking exposure to Shari’ah compliant companies.
Intellidex Insight: The NewFunds Shari’ah Top 40 ETF uses an ethical investment philosophy. Once constituents pass the ethical test, they are weighted by market value. Although the weight of big companies is capped, it still means the price movement of a large company will influence the price of the fund more than a small company. The attraction of this methodology is that it tends to favour companies that are performing well. Equities occupy 93.45% of this fund, which is a riskier asset class than cash and bonds. The fund has a low fee structure with a total expense ratio (TER) of 0.38%. Most constituents have operations and markets beyond SA, so rand value fluctuations affect the fund’s returns.
Fund description:The NewFunds Shari’ah is governed by Islamic principles and tracks the FTSE/JSE Shari’ah Top 40 index which consists of companies that comply with Islamic ethical investing.
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NewFunds Shari’ah Top 40 ETF
Top holdings: The top 10 constituents constitute 88.7% of the fund. Concentration risk is high, specifically in the resources sector. The two biggest constituents, Anglo American and BHP, constitute a combined 51%. This illustrates poor fund diversification compared with most JSE-listed ETFs weighted by market capitalisation.
Suitability: The ETF is suitable for long-term, risk-tolerant investors. Specifically, it appeals to investors seeking exposure to Shari’ah compliant companies.
Historical performance: The NewFunds Shariah ETF saw mixed returns since inception. Those who invested five years ago are still counting their losses. However, in the last three years to June, the ETF started ecovering. The fund has performed well in the first six months of the year, climbing 13.9% having benefited from its heavy exposure to resource stocks.
Fundamentals: The bulk of this fund is invested in companies that generate significant chunks of their earnings outside of SA, so they are influenced by the trajectory of the global economy as well as the rand exchange rate. By investing in the NewFunds Shariah ETF, you are investing in the underlying portfolio of companies with global operations and protecting yourself, to an extent, against rand weakness. With the rand expected to weaken, the fund might benefit given its exposure to rand-hedge stocks
The local economy recorded its worst quarterly growth since 2009 in the first quarter of the year, shrinking 3.2%. According to the Bureau of Economic Research, the weak GDP growth was largely due to factors such as loadshedding, weak demand, slow global growth and political tensions. Apart from loadshedding, the other factors appear to be with us for a while, so companies with local exposure will remain under pressure. However, with the recent interest rate cut we expect pressure on South African retail stocks to ease while consumer confidence may improve as the cost of debt has decreased.
Source: iress and June 2019 fact sheet
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NewFunds Shari’ah Top 40 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