Various empirical studies show that the bulk of equity returns stem from diversification among broad asset classes rather than from individual stock picking. As such, our grouping is done with a diversified portfolio in mind, ensuring appropriate exposure to different asset classes. First, we group the ETFs according to the three widely recognised asset classes – equities, bonds and cash.
Our picks should provide an investor with a relatively diversified portfolio, even if it was made up only of ETFs. However, asset allocation is not a one-size-fits-all concept. You need to make sure that weights of different asset classes in your portfolio meet your unique risk-and-return objectives. Multi-asset ETFs, which are already diversified among asset classes, are analysed as a separate category.
As a rule of thumb, we like ETFs that follow a watertight investment philosophy. They should also be tax smart, which means they should qualify to be in a tax-free savings account. To avoid overconcentration, a good ETF should cap its exposure to a single sector and/or a single counter. While competition among providers is intensifying and ETF costs are coming down, we look at this metric closely and prefer ETFs with low total expense ratios (TERs).
The Microeconomic view
The Satrix FINI 15 and NewFunds S&P GIVI South Africa Financial ETFs were the laggards with losses of 8.86% and 8.37% respectively. Resources funds, which topped the performance table in June, were among July’s worst performers. Satrix Resi shed 6.49% (YTD: +8.51%) while the NewFunds S&P Givi South Africa Resources ETF fell 5.78% (YTD: +3.82%).
We have split the ETFs featured into three broad categories:
Bonds and Cash:
As with equities, investors also need to diversify their bond portfolios internationally. Our choice is the Stanlib Global Bond ETF (-0.42% in July and +1.96% YTD) which tracks investment-grade sovereign bonds mostly issued by the US, UK, Japan and selected European countries. The Stanlib Global Bond ETF has the lowest TER in this category.
Dividend or income:
If you rely on your investment income for day-to-day expenses you may want to allocate a portion of your portfolio to ETFs that have a high distribution ratio. Property funds tend to have even higher pay-out ratios. We maintain our choice of the Stanlib SA Property ETF (down 3.59% and 1.62% YTD). The Stanlib fund boasts the lowest TER in the segment.
For foreign property funds ETFs, the Sygnia Itrix Global Property ETF (up 0.28% and 9.45% YTD) is the cheapest in this category.
If you find the process of diversifying your portfolio daunting, two ETFs can do it for you. They combine equities and bonds to produce a diversified portfolio for two investor archetypes with differing risk appetites:
Mapps Protect is more conservative, usually suitable for older savers.
Mapps Growth suits investors with a long-term horizon.
They were down 0.76% and 1.72% respectively in July, up 5.14% and 6.17% YTD respectively.
There's plenty more from where that came from. The team at Intellidex have more insights for the month of August. To see more in-depth analysis and market insights (global and local), check out the full note here.
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
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