Catch this insight by Intellidex on the South African equity market. This note is on the Sygnia Top 40 ETF. There are a few ETFs covering the JSE Top 40, so take note of this one when comparing between them.The Sygnia Itrix Top 40 ETF is the youngest among the four JSE-listed ETFs that track the FTSE/JSE Top 40
Intellidex insight:The Sygnia Itrix Top 40 ETF is the youngest among the four JSE-listed ETFs that track the FTSE/JSE Top 40 index. Consequently, it has the smallest assets under management, but it is competitive with the second-lowest total expense ratio. The cheapest fund is the Satrix 40.
The index construction methodology inherently gives more weight to winners. While the fund achieves its intended factor exposure – allocating more weight to companies with bigger market capitalisation – the methodology results in a concentrated portfolio, dominated by a few big companies such as Naspers/Prosus. More diverse markets such as the S&P 500, where the idea originated from, are less prone to similar shortcomings. However, on a positive note, larger companies tend to be more stable, which makes the fund ideal as an anchor portfolio. If you want to gain both local and global exposure in one transaction, the Sygnia Top 40 ETF is a good option. It is a natural rand-hedge. Investing through ETFs is tax-efficient and minimises costs.
Fund description:The Sygnia Itrix Top 40 ETF tracks the FTSE/JSE Top 40 Index by investing in the physical securities of the index. The Index consists of the largest 40 companies, listed on the JSE, ranked by investable market capitalisation .
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Sygnia Top 40 ETF
Top holdings:The top 10 companies constitute 64.3% of the fund. The largest market capitalisation company, Naspers, makes up nearly 18% of the fund, with resources companies also holding high weightings. These somewhat dilute the diversification benefits one usually obtains with ETFs.
Suitability:This ETF is ideal for passive investors with an appetite for risk and seeking exposure to a portfolio of JSE-listed companies with broad market exposure. While equities are inherently riskier than other asset classes, especially over short periods, they have performed better than inflation and other investment asset classes such as bonds and cash over longer periods
We are worried by the sizeable difference between the performance of the fund and its benchmark, which means the fund is poor at tracking its benchmark. For an index-tracking fund this is a cause for concern.
Fundamentals:Equities are driven by economic activity. Due to the pervasive spreading of the coronavirus, we see both the local and global economies struggling this year. We believe responses by fiscal and monetary authorities should see the global economy recovering quickly once the virus peaks or is brought under control.
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Sygnia Top 40 ETF
Source: iress and January 2020 fact sheets
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Sygnia Top 40 ETF Fact Sheet
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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