In April the all-share index rose 3.66%, propelled by local retailers (up 10.01%) and banks (up 6.82%) on the back of an anticipated ANC election victory. In an April UBS report, SA-focused stocks were expected to benefit if ANC won the election by at least 55% of the vote.
The Microeconomic view
Little wonder that the best-performing local equity ETFs were NewFunds SA (up 7.84%) and Satrix Fini (up 7.46%), which have huge financial and retail exposure. Swix-weighted funds also did well. The equally weighted portfolio of JSE listed ETFs, excluding commodity ETFs, rose 2.53% while Intellidex’s portfolio was up 2.25%.
However, this month has started on the back foot with top resources stocks shedding 4.63% by close of business on 10 May. With the renewed global trade tensions, market gains since the beginning of the year are under threat.
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 0.64% in April) is a natural choice because it is least sensitive to sudden adverse interest rate movements. It is like earning interest on your cash at the bank with a minimal possibility of capital loss.
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 (up 3.37%), 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 (down 1.29%), 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.
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:
There's plenty more from where that came from. The team at Intellidex have more insights for the month of May. 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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