Catch this insight by Intellidex on the South African equity market. This note is on the Satrix Top 40 ETF, one of the oldest and most popular funds on the JSE. 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 Satrix Top 40 ETF, now 20 years old, exposes investors to the South Africa’s blue-chip stocks. It has the largest value of assets under management (AUM) and lowest total expense ratio among the four funds that track the FTSE/JSE Top 40 index. A few years ago, the fund sponsors decided to cap the fund’s total expense ratio at 0.10%, a feat that it can afford with an AUM of at least R8bn. Funds that have the lowest cost ratios are preferable as the savings have a huge impact on returns over the long term. For ETFs that track the FTSE/JSE Top 40 index, this is particularly important as there is not much separating them.
The FTSE/JSE Top 40 index considers the market capitalisation of all companies listed on the JSE. It uses market capitalisation as a tool for both stock selection and weightings. This results in a portfolio with high exposure to companies that dominate the market. The fund has decent sectoral diversification. However, the market-cap weighting means the fund’s performance is more responsive to the price movements of a few big companies, such as Naspers.
Gaining equity exposure through the Satrix Top 40 is tax-efficient and minimises costs. The fund can be used as a building block in a long-term investment portfolio.
Fund description:The Satrix Top 40 ETF tracks the FTSE/JSE Top 40 index. The Index consists of the 40 largest companies listed on the JSE, ranked by investable market capitalisation.
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Satrix Top 40 ETF
Top holdings: The top 10 constituents comprise 62.89% of the fund. Naspers and Prosus, which derive most of their value from Chinese online company Tencent, dominate the fund, which diminishes diversification and
poses a high risk to the fund’s performance should their stock prices dramatically decline
Suitability: This ETF is ideal for risk-tolerant, passive investors seeking exposure to marketleading companies. Equities are inherently riskier than other asset classes, especially in short periods. However, over the long term
they have historically performed better than inflation and other investment asset classes
such as bonds and cash.
Historical performance:
Source: http://etfsa.co.za/docs/perfsurvey/perform%20survey%20-%20Jan2020.pdf and January 2020 fact sheet
Fundamentals:The short-term prospects for this fund are under pressure due to the global outbreak of coronavirus and SA’s credit rating downgrade by Moody’s. Recent economic data shows the domestic economy is in recession, and Covid-19 will ensure that this unfortunate trend continues. However, willingness shown by global fiscal and monetary authorities to tackle the shock head-on with economic support initiatives is encouraging and serves to cushion the blow.
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Satrix Top 40 ETF
Fund statistics:
Source: iress and January 2020 fact sheets
Alternatives: The fund has a competitive TER of 0.10%. Its competitors are 1nvest Top 40 (TER 0.27%), Sygnia with 0.16% TER and Ashburton with the smallest TER of 0.14% among the three.
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Satrix 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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