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An Intellidex Special: Core ETF Portfolio

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The time ahead promises to be tough and volatility in the markets should remain, especially in SA. In such times, offshore diversification is an investor’s best bet.

Internationally, we have a few favoured core holdings: Satrix MSCI World ETF; Satrix MSCI Emerging ETF; FirstRand US Dollar Custodian Certificate; and CoreShares S&P Global Dividend Aristocrats.

Locally, we prefer defensive strategies: NewFunds Volatility Managed Defensive/Moderate/High Growth Equity ETFs; CoreShares South Africa Dividend Aristocrats ETF; and NewFunds TRACI 3 Month.

Core-satellite strategy

Locally, we think the NewFunds Equity Momentum and Satrix Resi ETFs can be added as satellite funds to core local equities holdings. Both funds are riding the optimism in commodities. We are more inclined to the former as it uses a volatility weighting which keeps risk at manageable levels.

The rally in gold could endure and exposure in gold mining compares is beneficial due to high leverage where small increases in the gold price could see outsized gains on the bottom line. Several theories supporting sustained strong gold prices include historically low interest rates (which reduce the opportunity cost of holding gold); rising inflation expectations due to global quantitative easing; gold’s safe haven status will hold given the uncertainty caused by Covid-19; and the dollar weakening against a basket of major currencies.

Internationally, the recent EU stimulus package could see the bloc recover quicker and stronger than other countries, which makes sense to add Sygnia Itrix Eurostoxx50 ETF as a satellite fund to international core holdings

Portfolio completion

Thankfully, the listing of the Satrix China ETF on the JSE in July helps close the gap of a lack of emerging market funds. The fund introduces a unique opportunity and can be used to increase Chinese exposure and participate in its peculiar growth story.

Final thoughts: rand paradox

While the rand has recovered from its worst levels, historically it remains at weak levels and this creates a bit of dilemma. Traditionally, most JSE index funds holding offshore equities have derived a significant portion of their returns from exchange rate gains, that is, the rand weakening against major currencies. Mean reversion is likely to play out in future and offshore returns can be suppressed or wiped out should the rand strengthen substantially.

However, the South African economy is likely to perform relatively worse than the global economy, so the rand could remain depressed or weaken even further.

Intellidex Reviews
July 2020: in the news
 

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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

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