Intellidex Equity ETF Picks
Equity ETFs could be the bees’ knees if you consider on average, September has been the worst month for the stock market over 96 years.
This sounds like every “Buy the Dip” INVSTRs dream come true and an opportune moment to kick start your ETF or TFSA portfolio.
Intellidex’s favorite Equity ETFs
Domestic equity:
The local market’s performance was influenced by a few factors: strong financial results; a new finance minister; the regulatory crackdown on tech companies in China; and developments around the eventual withdrawal of monetary stimulus by the US Federal Reserve (Fed).
Local counters performed well, boosted by positive company trading updates and results – the mid-and small-cap indices were up 3.7% and 6.9%, respectively. This helped markets to recuperate from the volatility seen during the July unrest, affecting operations on the ground in the real economy.
CoreShares Top 50 ETF (CTOP50)
Naspers/Prosus still dominate market movements in local equities due to their weighting in JSE indices. A case in point was the finalization of a share swap in August which allowed Naspers shareholders to trade their shares for Prosus shares as management tries to narrow the longstanding discount to net asset value that Naspers shares have been trading at, a move aimed to create value for shareholders.
The swap led to about R140bn worth of trading in the pair of shares, more than seven days’ worth of trading on the JSE. This caused a more than four-hour delay in opening on the next trading day due to a technical issue related to the swap.
Moreover, global investment firm Anchor Capital reports that volatility and negative sentiment towards China may persist in the short term, as its government continues with policy decisions related to its goal of “common prosperity”. This comes after an increase in inequality stemming from years of unchecked economic growth from urbanization, employment, and other strategic objectives.
The prospect of continued regulatory intervention makes it prudent to reduce exposure to Naspers/Prosus, which remain exposed through their investment in Tencent. CoreShares Top 50 (-0.8%) remains the best way to do this, as it not only improves diversification as a top 50 and not a top 40 ETF, but mainly due to its reduced weight in the Naspers/Prosus pair. The ETF may also enjoy the continued benefits of companies reporting strong earnings following the reopening of SA’s economy.
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Foreign equity:
Globally, equities, as measured by the MSCI World index, were up 2.4%. The Nasdaq index was the top performer (+4.0%) as US equities rebounded after US Fed chief Jerome Powell’s Jackson Hole (economic symposium) speech implied that the central bank would support the US economy for as long as it is needed to achieve a full recovery.
Equities were also augmented by strong US earnings in Q2. With 98% of S&P500 members having reported, average earnings growth came in at 89% for the quarter, far exceeding the 63% that was expected. High earnings were expected due to the base effects from last years’ Covid-affected results.
CoreShares Total World Feeder ETF (GLOBAL)
Our foreign equity pick for this month is the CoreShares Total World Stock Feeder ETF (+1.4%). Given the strong earnings performance and lofty valuations in the US, a reduced allocation to the superpower is reasonable. The CoreShares Total World Stock Feeder ETF does this, but only trims its exposure to the US at 59%. However, it makes up for this with increased emerging market exposure, which was at 10% of the fund at end-August.
In addition, its broad coverage of over 9,000 shares exposes investors to more mid-and small-cap equities, which can provide enhanced returns relative to large-cap stocks due to the widely researched size premium. The fund is reasonably priced with a total expense ratio (TER) of 0.29%
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Satrix MSCI EM ESG Enhanced Feeder ETF (STXEME)
This fund (+0.5%) provides direct exposure to the above-average growth prospects of emerging markets, relative to their developed market peers. This is balanced against the risks associated with emerging markets, in that a rise in infections and reduced economic activity would affect them more adversely than developed economies.
Given the usual risk associated with emerging markets, the ESG enhancement of this fund augments its diversification, which may prove useful for investors. It can also improve investor performance – research by index provider MSCI compares the top third of high-scoring ESG companies to their low-scoring counterparts (bottom third) in the MSCI All-Country World Index from April 2013 to November 2020. It found that the shares of top-performing companies outperformed the underperformers by 2.6% annually.
Importantly, the research also found that the performance was driven by higher earnings growth, which implies that high-scoring ESG firms’ share prices are justified by earnings growth, an outcome that equity investors like. The ETF is a bit pricey though, with a TER of 0.41%.
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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
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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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