Catch this insight by Intellidex on the Satrix FINI ETF. The Satrix FINI ETF equity is an aggressive fund suitable for investors seeking more exposure to SA’s financial and property sectors.
Intellidex insight: The Satrix FINI ETF is one of the two JSE-listed funds giving investors exposure to the South African financial sector and is dominated by local banking stocks. While the Satrix FINI ETF uses the typical market capitalisationweighting approach, its peer NewFunds S&P Givi Financial 15 ETF uses an enhanced approach which applies volatility and other unobservable inputs (such as cost of capital) to weight fund constituents.
So far, the Satrix FINI approach has been vindicated, outperforming its NewFunds counterpart by a wide margin for an extended period. In the five-year period to end-September, Satrix FINI outperformed NewFunds Givi by an average of 13.3% annually. However, Satrix FINI is a bit pricey, with a total expense ratio (TER) of 0.44% compared with NewFunds Givi’s 0.35%.
Generally, because sector funds are concentrated and respond similarly to certain macro factors (e.g. interest rates in this case) they can be used as “building blocks” in a well-diversified portfolio. Alternatively, you can take advantage of this uniform responsiveness to macro variables by increasing your tactical exposure to the financial sector if a macro tailwind is developing. This is called a core-satellite strategy. Using an ETF in a core-satellite trade reduces idiosyncratic risks associated with individual stocks.
Furthermore, the fund’s scrip lending activities helps minimise overall ETF costs.
Fund description:The ETF tracks the price performance of the FTSE/JSE Financial 15 index, which consists of the biggest financial and property companies listed on the JSE. This index uses a capped market capitalisation-weighted approach, where companies with larger market capitalisation occupy a bigger part of the index. However, individual constituents are capped at 30% of the index’s value.
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Satrix FINI ETF
Top holdings: The top 10 constituents constitute 74.7% of the overall fund. The top 10 constituents are more concentrated into the banking sector, which accounts for about 56% of the fund.
Suitability:The Satrix Fini equity is an aggressive fund suitable for investors seeking more exposure to SA’s financial and property sectors. The financial sector can work as a long-term growth play or a short-to-medium term defensive play, which makes this fund a good holding in most portfolios.
Historical performance:The ETF performance is impressive when considering the poor market conditions in the last few years.
Source: http://www.etfsa.co.za/docs/perfsurvey/perform%20survey%20-%20Nov2019.pdf and October 2019 fact sheets
Fundamentals: Unlike other sectors, the financial sector generates most of its income in SA. The Satrix Fini fund holds much value for investors with an optimistic view of the local economy and rand strengthening. For some time, the South African economy has been overshadowed by the politics which has hampered business confidence and growth. The poor trajectory of government finances, exacerbated by the burden of SOEs, has adversely affected the country’s sovereign credit rating. Consequently, local banks – which dominated the Satrix FINI fund – have also been downgraded along with SA’s sovereign credit rating. Without improvement in the economy and government’s finances, the fund faces significant downside risks.
Alternatives: There are no alternatives for this ETF.
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