Catch this insight by Intellidex on the South African equity market. This note is on the 1nvest Top 40 ETF. There are a few ETFs covering the JSE Top 40, so take note of this one when comparing between them. This ETF should be considered for high risk-tolerant investors.
Intellidex insight:The 1nvest Top 40 ETF is one of the four JSE-listed ETFs that track the FTSE/JSE Top 40 index, which houses South Africa's 40 largest company by market capitalisation. Companies with bigger market capitalisations such as Naspers get a bigger slice of the index and, in turn, have a big influence on the performance of the ETF.
The 1nvest Top 40 ETF is appealing because it invests in blue-chip companies known for their resilience and can therefore typically weather business cycles. Top 40 companies also offer important diversification because many of them earn a substantial percentage of their revenue from offshore. This reduces investor risk and, can be used as part of a core investment portfolio. The fund is both cost- and tax-efficient. The ETF is eligible for tax-free investment accounts. It rebalances four times a year to reflect changes in the top 40.
The fund has the second-largest assets under management among its peers but it has the highest total expense ratio (TER). While its mandate is to track the top 40 companies, the fund holds a small portion in cash and listed derivatives to effect efficient portfolio management, specifically when liquidity on the JSE is poor.
Fund description: The 1nvest Top 40 ETF tracks the FTSE/JSE Top 40 Index, investing in the 40 largest shares by market capitalisation.
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1nvest Top 40 ETF
Top holdings: The top 10 holdings constitute 67.6% of the fund. The combined weightings of Naspers and Prosus dominate the fund, which is a concern as their performances will unduly influence returns. However, the fund’s constituents have operations in several jurisdictions and in varied sectors, diminishing country-specific
risks to a degree.
Suitability: This ETF is ideal for investors with an appetite for risk and who seek exposure to the most liquid blue-chip companies on the JSE, some with international operations, which enhances diversification. 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.
Historical performance:
Source: http://etfsa.co.za/docs/perfsurvey/perform%20survey%20-%20Jan2020.pdf and January 2020 fact sheet
High-flying mining companies have been driving the returns of the portfolio for the past year.
Fundamentals:The 1nvest Top 40 fund is driven by both local and global economic activities. The fund has significant exposure to global markets through companies that have both local and foreign operations.
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1nvest Top 40 ETF
Still, the performance of the South African economy has a huge influence on the fund’s returns. SA’s fiscal deficit, struggling state-owned enterprises and electricity supply constraints are the main drivers of poor consumer, business and investor confidence in the local economy – all of which is compounded by the lockdown due to the coronavirus and SA’s credit rating downgrade by Moody’s. Intellidex sees economic growth contracting severely this year. Similarly, the global economy is expected to weaken substantially as a result of devastating effects of the virus. However, global monetary and fiscal easing should help cushion the blow.
Fund statistics:
Source: iress and January 2020 fact sheets
Alternatives: Although the fund has a relatively competitive TER of 0.27%, its competitors are the Ashburton Top 40 ETF (TER 0.18%), Sygnia Top 40 (0.12%) and Satrix Top 40 with the smallest TER of 0.10%.
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1nvest Top 40 ETF Fact Sheet
For more information around ETFs make sure to check out our new ETF site EasyETFs
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
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