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2022 ETF Lift-Off

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Intellidex ETF Picks

The phrase “new year, new me” is not quite true for the market as the themes that dominated in 2021 continue to do so as the year kicks off.

4 ETF Picks to Kick-Off the New Year:

Sygnia SWIX Top 40 ETF (STXSWX)

The FTSE/JSE Africa All Share Index advanced 24% in 2021, due to the global rebound from Covid-19 as well as an increase in demand for commodities. The good investment outcome should continue this year, with investors gaining value from local equities. For this reason, we turn to the Sygnia SWIX Top 40 ETF (+5%). This fund tracks the FTSE/JSE SWIX 40 Index, which consists of SA’s 40 largest listed companies. The Swix weightings methodology only considers shares held on the South African registry. This means that while the ETF selects constituents based on their market capitalisation, companies listed on other exchanges, as well as the JSE, are down weighted according to the proportion of the size of the foreign holdings. In this way, the fund provides a more accurate representation of the broad market owned by South African investors.

While Naspers and Prosus combined hold an abnormally high weighting of 19.1% (the two combined hold 28% of Chinese tech giant, Tencent), the rest of the investee companies have small weightings and are well-diversified across sectors. The ETF is also a rand hedge, acting as a shock absorber as it benefits from the weak local currency. Among the three JSE-listed Swix funds, Sygnia Itrix Swix 40 ETF has the lowest total expense ratio. With the three listed Swix funds similar in all respects, it is logical to gain exposure to the one with the lowest expense ratio. Overall, the fund is suitable as a building block for growth assets in a portfolio with other non-equity assets. Investors should be willing to tolerate high volatility but if held over a long horizon, the fund should grow ahead of both volatility and inflation.

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Sygnia Itrix Solactive Healthcare ETF (SYGH)

The first of its kind to list on the JSE, the newly listed Sygnia Itrix Solactive Healthcare 150 ETF (+5.6%) houses 150 of the top global healthcare companies, some of which are Covid-19 vaccine frontrunners. It is the first and only healthcare sector ETF. The JSE in general lacks sector-focused ETFs and such a fund could encourage similar ones in other sectors. The global access is particularly important because locally we have a limited number of healthcare stocks, which means that even if you were to buy individual shares you would still not be able to achieve great diversification. Healthcare is an attractive sector because its products are used by everyone. It does not matter your age, race or gender – you will always need healthcare for one thing or another, now and in the future. Then of course there is the emergence of Covid-19 as well as the possibility of new viruses, all of which provide constant earnings for the sector, particularly those companies with great innovation and technological capabilities. The individual holdings also make attractive investments and have come under the spotlight in this pandemic. If you have been vaccinated for Covid-19 you probably received either a Johnson & Johnson or a Pfizer jab. If you did not know these names before, thanks to Covid-19 you now know them for their innovation and front-running the vaccine developments.

Although the ETF has specific sector exposure which would normally increase its risk, the large universe of companies provides diversification. Being exposed to 150 different companies means exposure across different focus areas such as pharmaceutical, vaccines, consumer healthcare, mental health, primary care, etc. The objective of the fund is to replicate the price and yield performance of the Solactive Developed Markets Healthcare 150 Index as closely as possible by holding a portfolio of securities equivalent to the basket of securities in the index and in similar weightings to that of the index. The Solactive Developed Markets Healthcare 150 Index tracks the performance of the largest 150 companies from the developed market healthcare industry and is based on the Solactive Global Benchmark Series. Constituents are selected and weighted based on free-float market capitalisation.

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The CoreShare PrefTrax ETF (PREFTX)

In times of market crises – and we’re in the midst of one of the most dramatic ones in history – having low-risk investments with predictable income streams is an imperative. The CoreShare PrefTrax ETF (+6.1%) fits this bill and has a surprisingly impressive after-tax dividend yield, better than bonds.

A preference stock is a hybrid instrument possessing features of both common stock and debt. When it has convertibility (converted to a pre-determined number of shares in future) features, it tends to exhibit common stock performance. But in this ETF’s case – where the fund carries vanilla preference stocks without such exotic features – performance is similar to a debt instrument. The fund has non-convertible, floating rate perpetual preference shares which cannot be converted into ordinary shares or be recalled by the company. It primarily derives value from its coupon rate (and dividend yield) relative to prevailing market interest rates. This means, like other debt instruments, it has limited upside potential and is held by investors mainly for income generation. Trading in the ETF, as opposed to underlying preferences shares, affords improved liquidity, which is guaranteed by the market maker, Sanlam Private Wealth.

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Sygnia Itrix Global Property ETF (SYGP)

The Sygnia Itrix Global Property ETF (+4.9%) will suit a portfolio that requires regular income streams but does not want to sacrifice a lot of upside potential on the initial capital investment. The fund is dollar-denominated so investments will be hedged against any depreciation in the rand. However, the fund is likely to be volatile due to its foreign currency and equity exposure so it should be considered by investors with high risk tolerance and aim to maximise capital accumulation over a longer-term time horizon. Although dividends have come under pressure in the volatile market with companies cutting down on dividends to preserve liquidity, the recovery in the market means a recovery in earnings. REITs are also historically known to have high dividend payouts relative to other sectors and they are income generating in nature.

This particular fund, with a total expense ratio (TER of 0.24%) is cheaper than other JSE-listed global property ETFs. Its peers - the newly listed ABSA NewFunds Reitway Global Property ETF has an estimated TER of 0.69%, CoreShares Global Property of 0.52%, 1nvest Global REIT of 0.34%, and the 1nvest Global REIT index feeder of 0.34%.

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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 EasyEquities 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

Disclaimer

This research report was issued by Intellidex (Pty) Ltd. Intellidex aims to deliver impartial and objective assessments of securities, companies or other subjects. This document is issued for information purposes only and is not an offer to purchase or sell investments or related financial instruments. Individuals should undertake their own analysis and/or seek professional advice based on their specific needs before purchasing or selling investments. The information contained in this report is based on sources that Intellidex believes to be reliable, but Intellidex makes no representations or warranties regarding the completeness, accuracy or reliability of any information, facts, estimates, forecasts or opinions contained in this document. The information, opinions, estimates, assumptions, target prices and forecasts could change at any time without prior notice. Intellidex is under no obligation to inform any recipient of this document of any such changes. Intellidex, its directors, officers, staff, agents or associates shall have no liability for any loss or damage of any nature arising from the use of this document.

Remuneration

The opinions or recommendations contained in this report represent the true views of the analyst(s) responsible for preparing the report. The analyst’s remuneration is not affected by the opinions or recommendations contained in this report, although his/her remuneration may be affected by the overall quality of their research, feedback from clients and the financial performance of Intellidex (Pty) Ltd.

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