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2 Equity ETF Picks to Light-Up October

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Intellidex Equity ETF Picks

While “Buy the Dip” is still a thing, and a possible market rally to the end of the year could be imminent, Intellidex shares insights into 2 watchlist-worthy Equity ETFs.

Domestic equity:

CoreShares Sci-Beta Multifactor (SMART)

With the market experiencing high volatility and being affected by different drivers, we look at a fund that minimizes investment risk by combining six factors that are known to produce superior risk-adjusted returns over long horizons.

The Coreshares Scientific Beta Multifactor Index ETF (+1.1%) selects constituents using equal contributions of six factors that are well-grounded in academic literature: value, size, low volatility, momentum, profitability, and investment. These factors have exhibited superior risk-adjusted returns over longer investment horizons. Similarly, the fund’s weighting methodology takes a multi-pronged approach to further mitigate risk by optimizing diversification through adjusting the fund on four factors: concentration, correlation, the Sharpe ratio (a measure for risk-adjusted returns), and diversified risk weight. All four factors make an equal contribution in determining the weight of each constituent in the fund.

Research shows that multifactor models are more resilient to market volatility. Since active fund managers use similar approaches in portfolio construction, it means you get exposure to similar investment techniques but at a considerably lower cost. An important argument supporting multifactor funds is that they are more efficient at capturing the benefits of each factor, against a portfolio that seeks to gain exposure to the same factors by buying portions of specialist funds focusing on just one factor.

The fund tracks the Scientific Beta CS South Africa 6F-EW Index which provides exposure to the 50 largest and most liquid shares on the JSE and is rebalanced quarterly. A drawback is that its largest holding is Naspers at 11%, which has come under pressure from the regulatory threats in China. However, all other holdings account for less than 5%.

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Foreign equity:

Satrix Global Infrastructure (STXIFR)

Our foreign equity pick for this month is an exciting new listing on the JSE, the Satrix Global Infrastructure ETF. This fund exposes investors to the world’s leading listed infrastructure companies, which is particularly attractive to the local investor as SA’s infrastructure rollout has been frustratingly slow. The fund tracks the performance of the FTSE Global Core Infrastructure Index, which includes companies that generate at least 65% of revenue from development, ownership, operations, management, or maintenance of infrastructure. This broad activity list is related to three core infrastructure areas: energy, transportation, and telecommunications. Infrastructure has a low correlation with other asset classes and within different sectors in equities. This increases its ability to outperform when other asset classes underperform as a result of improved overall portfolio diversification, which may lead to improved risk-adjusted returns.

With $1.4bn in net assets, it assigns weights using the investable market cap method. This excludes shares held by insiders and management and adjusts for any limits on foreign equity ownership, ensuring liquidity. A closer look at the fund shows that it is heavily invested in North America, with the US (63%) and neighboring Canada (12%) making up three-quarters of the fund. The weight in the US means it will benefit from the US finalizing a $1tn infrastructure package, of which $550bn will be new spending.

Another aspect of the fund is its 51% exposure to utilities. Utility companies operate or own infrastructure assets such as roads or airports through concession agreements with governments over long periods. Regulations usually mean returns earned at utility cover expenses and the cost of capital, ensuring gradual company growth and stable returns to investors.

A drawback of this fund is that because it is a feeder fund investing in the iShares Global Infrastructure UCITS ETF, it comes with a high price tag of 0.80%.

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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.

Intellidex staff may hold positions in financial instruments or derivatives thereof which are discussed in this document. Trades by staff are subject to Intellidex’s code of conduct which can be obtained by emailing mail@intellidex.coza.

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