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5 Core ETF Strategy Picks

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Intellidex Equity ETF Picks

Compiling a core ETF portfolio and strategy just got a whole lot easier with this month’s Intellidex core ETF portfolio picks, check it out INVSTRs.

Intellidex analysis of Core ETFs:

Domestic equity:

Satrix Capped All Share ETF (STXCAP)

On 10 November Satrix is set to list the Satrix Capped All Share ETF, with the most comprehensive coverage of JSE-listed companies. Satrix introduced the world of ETFs to South Africans when it listed its flagship Satrix 40 fund in 2000. However, unlike the Satrix 40 which houses the 40 largest companies on the JSE by market capitalization, the Satrix Capped All Share ETF offers exposure to the all-share index, which had 143 companies at the time of writing. This is ideal for a broader market exposure as it brings in all market cap sizes (large, medium, and small) in one transaction.

The fund caps weights of individual constituents at 10% of the fund’s size, in conformity with one of the most important objectives of ETF investing, enhancing diversification. Consequently, 25% of its weight is composed of small- and mid-caps, which are underrepresented in most broad-based funds available on the market. The fund plans to maintain a total expense ratio (TER) of 0.25%, waived until June next year – an added incentive to take a bite now. Comparatively, other Top 40 or 50 funds have expense ratios ranging from 0.1% to 0.4%. Satrix 40 ETF is the cheapest.

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Foreign equity:

Satrix MSCI World ESG Enhanced (STXESG)

With the COP26 – the 26th annual global conference on climate change – underway in Scotland, the private sector is pledging big. The Glasgow Financial Alliance for Net Zero, consisting of more than 450 banks, insurers, and asset managers across 45 countries, says it could deliver as much as $100tn of financing to help economies transition to net zero over the next three decades. Take a moment to take that in. The alliance is made of investment managers accounting for $57tn of assets, $63tn from banks, and $10tn from other players such as pension funds.

This can only mean one thing: expect more capital flows into ESG. We have three JSE-listed funds that focus on the ESG theme: Satrix MSCI World ESG Enhanced; Satrix MSCI Emerging Markets ESG Enhanced; and Sygnia Itrix S&P Global 1200 ESG. At a TER of 0.33% the Satrix MSCI World ESG Enhanced is the most affordable. While the Satrix MSCI Emerging Markets ESG Enhanced is the dearest at a charge of 0.4%, it has strong diversification merits.

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Bonds and cash funds:

Satrix ILBI ETF (STXILB)

Most preference shares housed by the CoreShares Preftrax fund have a coupon rate indexed to the repo or prime rate. This means the fund has a short duration, which is positive in an inflationary environment when the repo rate is usually adjusted upwards by the central bank to fight inflationary pressures. Consequently, the fund increases in value with rising interest rates. The share price of CoreShares has, however, run hard in the last few weeks to reflect rising interest rates market expectations, which means the upside is now limited.

Similarly, inflation-linked bonds, like repo-linked preference shares, have a low duration. Compared with nominal bonds, inflation-linked bonds have less duration or interest rate risk which bodes well in a rising interest rate environment. So the idea is to sell down holdings of the likes of NewFunds GOVI, 1nvest SA Bond and Satrix SA Bond Portfolio, then go long in inflation-linked funds such as Satrix ILBI, Ashburton Inflation, and NewFunds ILBI. However, it is important to pay attention to the fee structure of these funds, where Satrix ILBI is the cheapest with a TER of 0.25% and CoreShares Preftrax is the most expensive at a TER of 0.55%. Of course, you want to buy the one with the lowest TER, holding other factors, such as tracking error, constant.

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Dividend/income:

Satrix Divi ETF (STXDIV)

Since Covid-19 hit, we have shied away from the Satrix Divi because of its methodology, in favor of the two aristocrat funds. Satrix Divi’s methodology is based on the expected dividend yield and potentially crowds in poor-performing stocks disguised by high forecast dividend yields. This is especially the case during marked market downturns such as at the height of Covid-19. But with vaccination levels improving and Covid-19 risk dissipating, we have seen the rerating of most counters and forecasted yields are less likely to be a deceptive measure.

The alternative CoreShares DivTrax is based on historically high dividend growth rather than yield. We also like that Satrix Divi utilizes forward-looking expectations, though this introduces more uncertainty and subjectivity. Sometimes history, besides that it is less subjective, can be a better guide of what to expect in the near term.

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Commodities:

1nvestPlatinum ETF (ETFPLT)

With limited commodity funds on the JSE, we tend to recycle between gold and PGM funds. While our focus for this month is platinum, our overall view on PGMs is that we are more bullish on platinum and rhodium and less so on palladium. On one hand, the platinum price is likely to rerate in the medium term as vehicle manufacturers substitute palladium for the much cheaper platinum. Rhodium, on the other hand, has no immediate substitutes, plus the fact that structurally, it occurs in smaller quantities than other PGMs. Between the two platinum funds, Absa NewPlatinum and 1nvestPlatinum, the latter is a cheaper option with a TER of 0.3% against Absa’s 0.35%.

Although PGMs have come under pressure due to microchip shortages, translating to low automobile manufacturing activity, we think there are strong fundamentals supporting demand. This is because they have multiple uses across different sectors – the automotive industry, industrial demand, jewelry, investment flows, and the hydrogen economy.

Another commodity worth mentioning is copper. It has strong tailwinds due to the transitioning to greener economies globally. The green economy will require higher usage of copper than the status quo. While there are no ETF funds giving exposure to copper, one can consider listed copper ETNs. Unlike ETFs, ETNs have credit risk as they only track but do not hold the underlying asset.

Important note: This ETF does not qualify for a tax-free savings account.

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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.

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Intellidex may also have, or be seeking to have, a consulting or other professional relationship with the companies mentioned in this report.