Intellidex Reviews September 2020: ETF Picks
The markets weakened in September as some economies experienced a second wave of Covid-19 infections. Asian shares mostly finished the month strongly on the back of strong economic data in China, with Chinese factory output in September higher than expected.
Gold, despite being a haven for many investors during this time of uncertainty, came under pressure, declining 4.9% in September because of the firmer US dollar.
The MSCI world index, a barometer for the dollar performance of developed market equities, fell 3.6%. Similarly, global futures were down 3.7%.
Locally, the All-Share index came under pressure, losing 2.2% to bring the year-to-date performance down by 3.2%. Emerging markets, which were previously favoured by investors, also came under pressure with the MSCI emerging markets index falling 1.8%.
In the currency market, the rand continued to strengthen against the US dollar after its sharp decline in March this year. It strengthened 1.1% in September, while the dollar strengthened against major currencies.
The weakness in local equities was mainly driven by gold shares (-11.3%) and platinum shares (-5.7%). This was partially offset by gains in financials (+2.2%) and slight gains in industrials (+0.9%). As a result, the Satrix FINI 15 ETF was the second-best performing ETF (+3.3%), behind the Absa NewFunds Value Equity which has 50.1% of its portfolio allocated to financials (+3.6%).
On the downside side, the worst-performing fund was the NewFunds Equity Momentum ETF (-5.2%) followed by the CoreShares SA Property Income ETF (-4.3%) and the Satrix Property ETF (4.3%).
Property shares were hammered when the country went into lockdown in March and have not recovered, with expectations that they will continue to be under pressure in the short to medium term.
In the commodities sector, the 1nvest Rhodium ETF has continued to outperform other ETFs, spiking up 16.1% in September. The worst performing ETFs were the Absa NewGold and FirstRand Krugerrand Custodian Certificate on the back of a declining gold price.
Global equities have come under pressure for a variety of reasons, including the increase in number of Covid-19 cases and deaths, as well as trade tensions hampering economic activity.
The Cloud Atlas Africa Real Estate ETF was the best performer (+2.8%), followed by the Cloud Atlas AMI Big50 ex-SA ETF (+1.4%). The worst performing ETFs were the Satrix Nasdaq 100, which fell 6.4%, followed by the Satrix S&P 500, which fell 4.7%.
Now for their pick of ETFs
Locally, we maintain exposure to anti-volatility strategies as we expect volatility to remain high in coming months. The JSE offers a number of such funds and investors can choose among three, depending on risk profile: NewFunds Volatility Managed Defensive Equity ETF (+0.9% in September), NewFunds Volatility Managed Moderate Equity ETF (+0.4); and NewFunds Volatility Managed High Growth Equity ETF (-0.5%).
These funds manage volatility and drawdowns simultaneously. They try to maintain the same amount of volatility within the fund under all market conditions by reducing equity exposure in times of high volatility and increasing the fund’s cash component, and vice versa.
The objective of these funds is to maintain a target level of volatility in the fund. Unlike most ETFs which have fixed rebalancing/reconstitution periods, these funds apply a target volatility (TV) process daily, so that volatility is always around the target level, ensuring the risk profile is not excessive for extended periods.
The most conservative of the three funds is the NewFunds Volatility Managed Defensive Equity ETF with a TV of 8%; followed by the NewFunds Volatility Managed Moderate Equity ETF with a TV of 15%; then the Volatility Managed High Growth Equity ETF with a TV of 20%.
International (Developed Markets):
We maintain our foreign exposure with the broad-based Satrix MSCI World Equity Feeder ETF
(-3.7%). A good alternative, though, is the Ashburton Global 1200 Equity ETF (-4.4%), but it has a higher total expense ratio.
Furthermore, you can add the 1nvest S&P 500 Info Tech Index Feeder (-3.5%) as a satellite fund because of the rally in the technology shares given the demand by people working from home.
International (Emerging Markets):
The Satrix MSCI Emerging Markets ETF (-2.2%) remains our only broad-based option. However, the new Satrix MSCI China ETF (-3.0%) provides a unique opportunity to increase exposure to the world’s fastest-growing major economy.
Also, the highly volatile Cloud Atlas AMI Big50 (+1.4%), which focuses on African equities, can be used to take a long view on the prospects of Africa, the truly remaining frontier market.
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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. We maintain our choice of dividend-focused strategies like the CoreShares S&P Global Dividend Aristocrats ETF (-2.9%) and the CoreShares South Africa Dividend Aristocrats ETF (-2.9%).
A key advantage of the dividend aristocrat strategy applied by these funds is that it selects constituents based on the actual dividend payouts rather than a dividend yield. This is particurlaly important now when financially challenged companies may deceptively exhibit high yields because of low market prices.
The strategy also tends to select companies that can endure difficult market and economic environments and whose earnings are not cyclical. Such funds are usually overweight in highly cash-generative and resilient sectors.
The only gripe we have with these funds is that they are pricey. The CoreShares S&P Global Dividend Aristocrats has a TER of 0.67% and the CoreShares SA Dividend Aristocrats ETF costs 0.55%. An alternative for the local choice is the CoreShares PrefTrax ETF. Although it is pricier with a TER of 0.61%, its yield is large.
Bonds and Cash:
SA’s fiscus is set to deteriorate substantially as tax collections take a hit due to the Covid-induced lockdowns, with declining profits reducing corporate tax, rising unemployment negatively affecting personal income tax and the border closure reducing import taxes.
Local bond yields are higher than global bond yields and this could drive global investment into local bonds, which would drive up the bond prices. On the back of this, an investor can gain exposure to local bonds through the Satrix SA Bonds ETF (-0.3%). This fund pays a quarterly dividend which can provide relief to an investor in the current environment of declining disposable income.
The only other option on the JSE is NewFunds S&P Namibia Bonds (-0.1%). As “risk-on” sentiment improves, such bonds are likely to recover as investors start searching for better yields. For short-term investors, usually less than a year, we maintain the NewFunds TRACI (+0.3%) as our choice
If you find the process of diversifying your portfolio daunting, two ETFs will do it for you. They combine equities and bonds to produce a diversified portfolio for two investor archetypes with differing risk appetites: Mapps Protect ETF (-1.1%) is more conservative, usually suitable for older savers. Mapps Growth ETF (-1.5%) suits investors with a longer-term horizon. Notably, both funds invest in SA-listed assets, thus lack an offshore flavor.
Adding a commodity ETF to your portfolio improves diversification because commodities march to the beat of their own drum – they are not in synch with broader equity markets. Rhodium has been our metal of choice since the start of last year and it did wonders to our portfolio. It seems the metal was also able to recover most of its Covid-19 losses.
Demand for rhodium is expected to be driven by the reopening of the automotive industry globally. Further demand will be driven by the increased demand in light-duty vehicles as the world moves towards greener and cleaner technology. The CEO of Northam was quoted as saying that the market for palladium has moved closer to balance while that of rhodium remains in significant deficit.
1nvest Platinum ETF (+16.1%), is our preferred vehicle for investors seeking exposure to rhodium as it presents stronger fundamentals than the other platinum group metals. This ETF is backed by physical rhodium. The drawback is that the EFT is quite pricey, with a total expense ratio of 0.75%.
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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