Intellidex ETF Picks
Diversification is still “King of the Hill” amongst INVSTRs who would rather play it safe while racking in those dividends and interest over the long term.
Here are a couple of Intellidex top picks to diversify your ETF portfolio:
Dividend/income:
Coreshares S&P500 Dividend Aristocrat ETF (GLODIV)
Dividends are driven by company earnings. If companies are doing well and growing their earnings as well as cash flows, they are likely to declare a dividend, often higher than the previous one. For local companies, though, this has been challenging because the economy was ailing even before Covid-19 and it is likely to lag global peers in the post-Covid recovery.
Both advanced and developed economies are on average likely to recover to pre-pandemic levels of GDP much sooner than emerging markets. This is mainly because of the pace of vaccine programs, which will determine the pace at which lockdown restrictions ease and economic activity return to normal. We have also seen that advanced economies implemented supportive monetary and fiscal policies which helped to manage the pandemic better than the likes of SA. The Coreshares S&P500 Dividend Aristocrat ETF (+1.0%) exposes an investor to global dividend-paying companies, with its largest holdings in the US, followed by the UK. It also serves as a rand hedge. A drawback of this fund is that it is quite pricey with a total expense ratio of 0.66%.
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Diversified funds
Diversification, daunting as it may seem, is an important consideration for an investor’s portfolio. Investments should be diversified both within equities – across sectors, for example – and across asset classes. The NewFunds MAPPS Protect ETF (-0.9%) handles this asset allocation for you.
Along with the more aggressive NewFunds MAPPS Growth ETF (-1.3%), it is probably the most diversified ETF on the JSE. With exposure to equities, bonds, and cash, the fund is invested in assets that exhibit different qualities and absorb market shocks differently. This means that negative returns from one asset class can be offset by positive returns from another asset class that has a negative correlation to it.
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Bonds and cash funds:
US Dollar Custodian Certificate (DCC) ETF
The market has been experiencing rising US treasury yields which have lifted banking and other financial shares. This has been driven by the likelihood of US policy normalization and rising inflation fears. Against this backdrop, our pick for this month is the US Dollar Custodian Certificate (DCC) ETF (+2.7%). US DCC offers investors direct exposure to US treasury bonds. DCC does not track any index, but RMB uses its discretion on which maturities to acquire. It then creates US dollar custodial certificates which are listed and sold on the JSE. Dividends are paid regularly whenever coupons are received from the issuer, the US government.
This fund is suitable as a hedge against the rand's weakness. The US dollar has been a beneficiary of rising yields, hitting 10-month highs in September against a basket of major currencies, with its safe-haven status coming through in times of market uncertainty.
Important note: This ETF does not qualify for a tax-free savings account.
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Commodities:
ABSA NewPalladium ETF (NGPLD)
Although commodities have recently come under pressure after their strong rally earlier this year, we think there are strong fundamentals supporting demand – especially platinum group metals (PGMs). This is because they have multiple uses across different sectors – the automotive industry, industrial demand, jewelry, investment flows, and the hydrogen economy.
Palladium in particular experienced a supply deficit in 2020 which is expected to widen again in 2021 as demand grows, driven by auto demand in developing markets. Persistent market deficits have eroded above-ground inventory. There is also an opportunity to substitute rhodium – which is pricier – with the more affordable palladium in autocatalysts.
Supply remains constrained as SA mines, which account for the largest PGM producers, are undercapitalized. Other issues causing supply constraints include frequent mining strikes because of wage disputes, the lack of reliable energy-generating infrastructure, and energy supply for mining companies.
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Informed decisions
Looking ahead, Covid-19 remains topical as investors seem to be worried that the global economy has lost momentum due to the effects of the Delta variant and the prospects of central banks reining in their stimulus packages in the face of rising inflation.
Other factors at play in the short to medium term include Inflation fears particularly given rising energy prices, the global tightening of monetary policies. The Chinese regulatory environment and Evergrande’s financial woes are in focus and not to forget the SA elections.
New to investing
and want to learn more about other Intellidex ETF picks?
Read: Portfolio Protection ETF Picks
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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.
Intellidex staff may hold positions in financial instruments or derivatives thereof which are discussed in this document. Trades by staff are subject to Intellidex’s code of conduct which can be obtained by emailing mail@intellidex.coza.
Intellidex may also have, or be seeking to have, a consulting or other professional relationship with the companies mentioned in this report.