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3 Themed ETF Picks this November

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Intellidex Equity ETF Picks

The ‘Dip’ has come and gone so what’s next? Long-term portfolio sustainability is key as Intellidex looks at different themed ETF strategies for long-term portfolio gains.

Intellidex analysis of Satellite ETFs:

Local smart beta:

NewFunds S&P GIVI SA Top 50 (GIVISA)

NewFunds S&P GIVI SA Top 50 ETF might just be well-positioned to navigate both inflation and supply chain fears as it houses companies that are perceived to be geared for relative earnings outperformance. It is a fundamental and forward-looking investing vehicle that offers investors diversified exposure to the 50 largest JSE-listed stocks selected by intrinsic value and low volatility. Each stock in the index is weighted by its intrinsic value, determined by its book value and its discounted projected earnings.

However, relative to market funds it has performed poorly over the years. Either the earnings’ forecasting methodology is flawed, or earnings growth has not been properly rewarded by commensurate share price growth. However, its fellow fundamental-focused peer, Satrix RAFI – based on historical rather than forward-looking fundamentals of sales, cash flow, book value and dividends – has done relatively better, even better than market-weighted funds on both 1-year and 3-year return periods. Its strategy lends itself to value investing which has outperformed this year.

Most listed ETFs use some form of market capitalisation weighting to populate constituents. This means that over time, stock prices that climb the fastest end up taking up a big portion of the portfolio. This has two negative consequences – it gradually diminishes diversification, but it also means that such funds shift exposure toward recent winners and against losers. That means it can have a bias toward overvalued stocks relative to stocks with upside potential. If you believe that it is important to eliminate this bias, as typical value investors do, both the NewFunds S&P GIVI SA Top 50 ETF and Satrix Rafi ETF can give such nuanced exposure.

In finance the perceived value drivers of a stock are referred to as fundamentals. Most of the stocks that wind up taking sizeable chunks in these funds have a value-tilt, meaning they have low prices relative to earnings. Because value stocks tend to move somewhat differently from the market as a whole, including them in your investment mix should improve your portfolio’s diversification and return properties. For example, a strong case can be made for a fundamentals-based weighting approach following the US tech stocks crash in the early 2000s, where investors lost big after buying up tech companies that had abnormally high prices relative to earnings and poor cash metrics.

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Growth factor (Tech):

1nvest S&P 500 Info Tech Index Feeder ETF (ETF5IT)

The US reporting season has, for the most part, surprised to the upside with earnings topping expectations. Unsurprising, the standout performer is the tech sector. We think it is a train that you can still board if you had missed it initially. The world is gravitating towards tech-driven solutions and we expect continued strong growth from the sector. The tech-focused funds on the JSE in order of our preference based on cost are 1nvest S&P 500 Info Tech (TER: 0.35%), Satrix Nasdaq 100 (TER: 0.48%), and Sygnia Itrix 4th Industrial Revolution Global Equity (TER: 0.59). There are nuances to these funds but in the main, you get pretty much the same factor exposure. We will explore the nuances in future.

Alternatively, you can punt on the whole US market which is home to most tech companies. Buying the whole US market diversifies risk and gives exposure to sectors of the market that have been overlooked and are likely to rerate as Covid goes farther into the rearview mirror. Satrix S&P 500 (TER: 0.25%), CoreShares S&P 500 (TER:0.39), and Sygnia Itrix MSCI US (TER: 0.86) provide focused US exposure.

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Buying Chinese dip:

Satrix MSCI China Feeder Portfolio (STXCHN)

Charlie Munger, a long-time Warren Buffet business associate, recently doubled down on Chinese tech giant Alibaba despite all the noises coming out of China. Similarly, renowned Bridgewater Associates hedge fund billionaire co-chair and CIO Ray Dalio, who runs one of the biggest hedge funds globally, added an interesting perspective on China during a Bloomberg interview with Tom Keene: “Why would the Chinese kill the goose that is laying the golden eggs.” The bottom line is that while China is dealing with wealth redistribution social issues, it should not be conflated with being uninvestable. It is an emerging country with a growing middle class and its economy has some legs to run, driven by the “Socialism with Chinese characteristics” model, which has made it the second-biggest economy in the last three decades and is likely to make it the largest economy in the next decade. But there could still be short-term pain for investors.

Satrix MSCI China (TER: 0.63%) and Satrix MSCI Emerging Markets (TER: 0.4%) ETFs give exposure to the Chinese economy. The latter balances off the Chinese geopolitical risk. Also, it will be a nice mix with US counters that appear to be priced for perfection.

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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

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