ETF ANALYSIS
NewFunds Shari'ah Top 40 Index Fund
Performance review
The Shari’ah Top 40 ETF had a good year relative to other funds that track the top 40 index returning 10.4% against 1.6% for the index. This was largely due to the Shari’ah ETF being overweight in the basic materials sector, which had quite a run in 2016.
On a longer time comparison, particularly the past five years during which commodity prices crashed, the Shari’ah fund underperformed. Investors should note that although the Shari’ah fund uses the JSE top 40 index as its investment universe, it has only 18 constituents as the others are excluded for not meeting the qualification criteria. The constituents of the Shari’ah Top40 make up just 37% of the top 40 index, which explains the low correlation in their performances. The Shari’ah Top40 ETF materially underrepresents consumer goods & services and financials as it excludes all the banks as well as Naspers and Richemont.
Outlook
Resource stocks make up more than half of the the Shari’ah Top 40 ETF. Naturally, resources are cyclical and as such the fund is extremely volatile. The resources sector has been through a rough patch since 2013 as commodity prices plummeted, but some resource prices such as iron ore almost doubled in 2016, as did the shares of some resources companies.
Some analysts believe resources have bottomed-out and are likely to remain on the recovery path for the foreseeable future. Also, the commodity crunch saw a number of resource firms restructuring to curtail costs. The recovery in commodity prices and the positive effect of the restructuring exercises are likely to give a double boost to earnings and ultimately drive the value of the Shari’ah fund. The South African economy also looks to have stabilised – albeit with low growth – but issues such as political uncertainty, global interest rates and credit ratings can have far-reaching effects on economic performance. These bring the potential for huge downside risk.
Key facts:
Suitability
The NewFunds Shari’ah Top40 is an investment instrument created to comply with Islamic ethical investing principles. For that reason certain companies are excluded. The ETF will suit investors wanting to add equity exposure to their portfolios while complying with the investment principles of Islamic law. This does not necessarily mean you are forgoing returns because ethical investments may, in the long run, also be the best-performing investments. However, this and other ethically based investment strategies do exclude investments that could be good performers
What it does
The NewFunds Shari’ah Top 40 Index ETF tracks the performance of FTSE/JSE Shari’ah Top 40 Index. The index is designed to reflect the Shari’ah compliant companies identified from the FTSE/JSE Africa Top 40 Index by Yasaar Ltd, which provides independent Shari’ah compliance solutions in terms of stringent Shari’ah standards and principles.
Top holdings: The top 10 holdings of this ETF occupy 84% of the fund. The biggest one, BHP, constitutes 24%, which shows poor fund diversification compared with most JSE-listed ETFs weighted by market capitalisation.
Risk: One major weakness with social responsible investing is the limited choices which exposes it to high concentration risk and poor sector diversification. This is evident in this ETF which, after qualitative screens, ends up concentrated in resources.
Alternatives
There are no direct peers. Several funds track the top 40 index without any constraints, such as the Satrix 40 and CoreShares Top 40.
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 (in this case, US treasuries). 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 more than one company or instrument in a single transaction. ETFs can be traded through your broker the same way as shares, say, on the EasyEquities platform.
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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