Intellidex ETF Picks
2021 is set to be another exciting year for investing in the ETF market and Intellidex’s ETF picks could just set your portfolio on an upward trajectory.
Intellidex ETF strategy
We believe volatility remains an important metric to watch and forms the basis of our ETF selection. However, with a Brexit deal, a Biden presidency and vaccine rollouts, albeit with some bottlenecks, we believe volatility will be much subdued this year which generally bodes well for the markets.
On balance we are cautiously optimistic, and our ETF strategy incorporates some of the following themes and assumptions:
- Global widespread economic recovery, more so in developed countries and China which have enough economic ammo, augmented by vaccine rollouts.
- Prevailing low interest rates globally
- Sectors decimated the most are likely to see the most rerating.
- Emerging markets including SA likely to benefit more from the risk-on sentiment and strong commodity prices.
- Weakening dollar
- While China continues to be an economic force, its heavy handedness towards Hong Kong, Australia and in the South China Seas is a concern
- Declining volatility levels
- Expectations of another US stimulus package of between $1tn and $3tn.
- Continued growth in demand for environmental, social & governance (ESG) focused investments
Coupled with other points raised above we make wholesale changes to our ETF portfolio from last year. We drop several funds and introduce five new picks. While some will form part of the core portfolio, others are satellite funds to take advantage of tactical investment themes: Satrix Top 40; NewFunds Value Equity or Ashburton MidCap; MSCI World ESG Enhanced; MSCI EM ESG Enhanced; and Sygnia Itrix MSCI Japan.
Now for the Intellidex favorite ETF picks
Local (Domestic equity):
For the better part of last year, we were invested in anti-volatility strategies. In hindsight, a major weakness in their construct is trying to time the market, moving into cash when volatility is high, which meant that they missed out on the recovery which took place during elevated volatility.
While volatility is likely to remain slightly elevated, though markedly lower than last year, we think a market play as our core holding is in order via the Satrix Top 40 fund (+4.4% in December). By investing in SA’s biggest companies by market capitalization, the fund gives balanced local and indirect offshore exposure. It is likely to benefit from positive growth locally, while balancing out any disappointments through its significant international exposure. The fund has the lowest expense ratio among its peers.
Tactically, for a satellite fund, we believe value stocks are due for a rerating should economic fortunes improve, even marginally, as they have taken the most pain due to Cocid-19 and it stands to reason that they will likely experience the most recovery.
A few funds come to mind: NewFunds Value Equity (+4.5%); Ashburton MidCap (+6.6%); and Satrix FINI (+7.8%). Overall, our preference is the NewFunds Value Equity fund, which explicitly incorporates empirically-backed value attributes in its methodology and weight constituents by risk – equally weighted scores of book-to-market and earnings-to-price ratios.
International (Developed Markets):
We believe the demand for ESG-focused investments will continue to grow for the foreseeable future as the urgency towards addressing climate change and social injustices becomes more entrenched globally. The promise by US president-elect Joe Biden to rejoin the Paris Climate Agreement further strengths the investment case and, incidentally, SA-born Elon Mask has just become the world’s richest person thanks to his equity stake in Tesla, an electric vehicle manufacturer. The Satrix MSCI World ESG Enhanced ETF decreased by 1.6% in December.
Separately, we like Sygnia’s MSCI Japan ETF (-0.9%) as a satellite fund. Japan’s export-oriented economy could benefit as the global economy wakes from the Covid-19 slumber, plus its valuation is not as stretched as its US counterparts which now have elevated risk from potential tax hikes or regulatory burden. Also, the yen could benefit from the decoupling of the dollar as the international trading currency.
International (Emerging Markets):
We like the Satrix MSCI EM ESG Enhanced ETF (+3.8%) for the same reasons we like its developed markets counterpart above. Plus, emerging markets as a distinct asset class deserve to be in a portfolio of a global investor, given its potentially higher growth rate than developed markets. Investors need to be aware that the fund is dominated by Chinese companies.
Although China has been the global standard for growth, development and innovation for years, lately it has drawn criticism from the way it handled the Covid-19 outbreak as well as using its economic and military muscle to bully other nations.
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Dividend & Income-themed funds:
For investors who rely on investment income to fund day-to-day expenses, an allocation of a portion of your portfolio to ETFs that pay high dividends may be useful. We maintain our choice of dividend-focused strategies: CoreShares S&P Global Dividend Aristocrats ETF (+3.4%) and the CoreShares South Africa Dividend Aristocrats ETF (+4.1%).
A key advantage of the dividend aristocrat strategy is that it selects constituents based on growth in the absolute size of dividends rather than the dividend yield. This is particularly important now when financially challenged companies may exhibit deceptively high yields because of low market share prices, such as property funds.
The strategy also tends to select companies that can endure difficult market and economic environments and whose earnings are not cyclical. Such funds usually are overweight in highly cash-generative and resilient sectors. The main drawback is that these funds are pricey. The CoreShares S&P Global Dividend Aristocrats has a TER of 0.78% and the CoreShares South Africa Dividend Aristocrats ETF costs 0.63%.
Bonds and Cash funds:
Bonds improve risk-adjusted returns of the overall portfolio as they tend to be more resilient when equities are under pressure and vice versa. Also, our local bond yields remain higher than global bond yields and this could drive global investment into our local bonds if a “risk-on” environment persists. We also think that bonds can benefit if the SA government implements expenditure cuts and reforms needed to address structural weaknesses to the economy.
Consequently, investors can gain exposure to local bonds through the Satrix SA Bonds ETF (+2.6%), the cheapest in class.
This fund pays a quarterly dividend which can provide relief to an investor in the current environment of declining disposable income. For short-term investors, usually less than a year, the NewFunds TRACI (+0.3%) is the appropriate investment vehicle.
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If you find the process of diversifying your portfolio daunting, two ETFs will do it for you. They combine equities and bonds to produce a diversified portfolio for two investor archetypes with differing risk appetites: NewFunds Mapps Protect ETF (+2.8%) is more conservative, usually suitable for older savers.
NewFunds Mapps Growth ETF (+3.6%) suits investors with a longer-term horizon. Notably, both funds invest in SA-listed assets, thus lack an offshore allocation.
Adding a commodity ETF to your portfolio improves diversification because commodities march to the beat of their own drum – they are not in sync with broader markets. The structural drivers for rhodium remain strong through demand for greener and cleaner technology, while rhodium remains in short supply.
1nvest Rhodium ETF (+1.6%), is our preferred vehicle for investors seeking exposure to rhodium as it presents the strongest fundamentals out of all the PGMs. This ETF is backed by physical rhodium. The drawback is that the EFT is quite pricey, with a TER of 0.75%.
The outlook discussed above calls for a strategy of investor patience and portfolio diversification with a healthy offshore allocation. In addition, recent rand strength may provide relatively cheaper buying opportunities, with any future rand depreciation boosting investment performance.
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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