This is our last note of the year and global equities look set to close on a high if sentiment remains upbeat – but we think markets are still fickle. Including the JSE all share index, most global equity indices closed October higher on renewed optimism over trade talks, a US interest rate cut and a decent start to the third quarter global earnings season. This has seen bonds retreating with yields recovering.
October’s equal-weighted portfolio of all JSE-listed ETFs returned 2.04% (year-to-date: 14.01%) while Intellidex’s ETF portfolio grew 1.63% (ytd: 22.39%). Note however that our portfolio has changed slightly over the period as we switched ETFs in some categories. Local-asset ETFs averaged a return of 2.02% in October while international-asset ETFs – which also derive part of their return from the rand/dollar exchange rate movement – increased by 1.66%.
The rand was steady against the greenback over the month, marginally appreciating by 0.3%. Commodity ETFs were up 3.29% on average.
The Microeconomic view
On the flipside, NewFunds S&P GIVI South African Industrial lost 5.5% followed by CoreShares PrefTrax, which retreated 1.4%. Among commodities, the palladium funds rose more than 7% in October while the rhodium fund was almost flat, edging up 0.9%. However, the rhodium fund has been the best-performing fund on JSE by a long shot since the beginning of the year, up 125.7%. The Standard Bank palladium fund is a distant second but still with very attractive growth of 49.5% year to date.
Given this backdrop we think South African-facing stocks will remain under pressure, with the JSE generally marked by high volatility and low liquidity. This underscores a need for offshore diversification. Locally we think investors should tilt their portfolios towards income-focused assets to cushion the lack of capital appreciation.
We have split the ETFs featured into three broad categories:
Fixed income and Cash:
Fixed income securities should find their way into a well-diversified portfolio due to their risk-diversification attributes. If you are investing for a short period, usually less than a year, then the NewFunds TRACI (up 0.8%) is a natural choice because it is least sensitive to adverse interest rate movements. For a longer investment horizon, protecting your investment against inflation is paramount.
We maintain our choice of the Satrix ILBI ETF (1.0%), which 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. The only option for local nominal bonds is the Newfunds GOVI ETF (-1.2%).
As with equities, investors also need to diversify their bond portfolios internationally. Our choice is the Stanlib Global Bond ETF (-0.8%), 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.
Dividend or income:
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. Our pick here is the Satrix Property ETF which has a brilliant diversification approach.
For foreign property funds we like the Sygnia Itrix Global Property ETF (+0.9%). It has an aggressively low total expense ratio (TER) of 0.19% that significantly undercuts its competitors, whose charges range from 0.34% to 0.52%.
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 November. 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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