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 over-concentration, 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
Three of the top five performing ETFs in June have the momentum theme: NewFunds Equity Momentum (+12.1%), NewFunds Volatility Managed High Growth Equity (+9.0%) and Satrix Momentum (+8.2%). The Satrix Resi and the Ashburton Top 40 complete the top five. With resource stocks having maintained a positive momentum since the beginning of the year it’s no surprise the namesake ETFs performed well. Conversely, local government bond funds had a subdued month, with the NewFunds Govi fund losing 2.2% in June.
(Image source: BusinessDay/Russell Roberts)
We have split the ETFs featured into three broad categories:
Bonds and Cash:
Bonds should find their way into a well-diversified portfolio due to their risk-diversification attributes. If you are investing for a very short period, usually less than a year, then the NewFunds TRACI 3 Month (up 0.59%) is a natural choice because it is least sensitive to sudden adverse interest rate movements.
You can also park your funds in a money market fund if you’ve a lump sum that you wish to put down as a deposit for big-ticket item purchases like a house or car while you shop around. It’s a better option than putting money in a current account that does not earn interest.
For a longer investment horizon, protecting your investment against inflation is paramount. We maintain our choice of the Satrix ILBI ETF (+0.20%), has the lowest expense ratio in this category.
Furthermore, nominal bonds add a unique risk-return dimension that differs from inflation-linked bonds and improves overall portfolio performance. As with equities, investors also need to diversify their bond portfolios internationally. Our choice is the Stanlib Global Bond ETF (-1.55%), 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.
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 (up 1.07%). The Stanlib fund boasts the lowest TER in the segment.
For foreign property funds ETFs, the Sygnia Itrix Global Property ETF (up 3.51%) 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:
There's plenty more from where that came from. The team at Intellidex have more insights for the month of July. 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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