Know your ETF - Sygnia Itrix Sustainable Economy ETF

Towards the end of every year, top analysts from renowned investment banks and asset management firms release their expected annual return for the S&P 500 index for the following year. Very seldomly do they forecast negative returns for the index which tracks the performance of the 500 largest companies listed on stock exchanges in the US. 

The current tough economic climate has forced analysts to slash their expected earnings growth for companies and the overall S&P 500 index. Goldman Sachs cut its 2022 estimate for the index to 3,500 points from a previous target of 4,300. The investment bank cited higher inflation as a major risk to its outlook. Inflation in the US reached a 40-year high of 9.1% in June before easing to 8.2% in September, while core inflation, which excludes volatile items such as food and energy, has risen steadily to 6.6% in September from 5.9% in June. 

The elevated prices caught many central banks off guard, which necessitated aggressive interest rate hikes. Indeed, the US Federal Reserve increased the Fed funds rate by 75 basis points in September for the third consecutive time this year, bringing the benchmark interest rate to a target range of 3.0%-3.25%. The Fed signalled further interest rate increases until inflation is brought under control. The rate hiking cycle has prompted investors to turn to the dollar for safety, increasing its value. Generally, a stronger dollar means that imports are cheaper for US consumers, which leads to lower inflation. However, this does not seem to be the case. 

What's worrying investors is that two of the last three tightening cycles have resulted in a recession. While the Fed is pointing to a strong labour market, most economists are forecasting that the higher rates will trigger a recession. 

Other major economic institutions such as the IMF, OECD and World Bank are expecting slower global growth of around 2% due to higher inflation and interest rates. 

The S&P 500 is widely regarded as a good gauge for the performance of stock markets worldwide and the overall economy. Tesla, one of the largest companies in the index, posted Q3 revenue of $21.5bn, slightly lower than the expected $22.0bn. The company noted that its biggest risk remains the stronger dollar, which affects the affordability of its vehicles for customers outside the US. Other challenges mentioned by the company are higher input costs and supply chain disruptions.

The latter, induced by the pandemic, have exacerbated price pressures. By increasing interest rates, central banks are placing emphasis on the outcome, which is a result of factors outside their control. Interest rates are expected to remain at elevated levels over the medium term to discourage consumers from borrowing to supplement their incomes.

Monetary policy has been accommodative since the global financial crisis in 2007/08 as central banks increased money supply which resulted in a rally in stock markets globally. The sudden increase in rates is a headwind for equity valuations as it raises discount rates while reducing expected cashflows.

The S&P 500 is in bear market category as it is down by more than 20% year-to-date. Some of the largest companies in the index such as Microsoft and Apple have declined by more than 30%. For the patient investor, the depressed prices might represent a good buying opportunity as inflation and interest rates will eventually moderate.

The ETF seeks to provide investors with low-cost exposure to companies listed on the S&P 500 index. It has a portfolio size of R2.9bn implying that it can withstand a protracted downturn. It has a tracking error of 0.05%, which signals that the fund is rebalanced frequently to match the index. The ETF also provides a rand hedge benefit as its returns are not only driven by the performance of the companies within the index but also the rand-dollar exchange rate.

Consequently, the HBR’s analysis reveals that over 50 times more waste may be generated over a shorter time frame than IRENA estimates by 2050, which would mean renewable energy acceleration at the cost of a spike in pollution – a sustainable economic problem.

However, HBR indicates that the expected waste problem is a potential economic opportunity. Its points to US-based First Solar – one of the companies in the top 10 holdings of the Sygnia Itrix Sustainable Economy ETF – as one of few Solar power providers that have a recycling initiative.

It is, however, costly and the HBR reports that it can cost up to $30/panel to recycle compared to just $2/panel to simply send an old panel to the landfill as they consist of mostly low-value materials (such as glass) but are costly to recycle given their bulky nature and the specialised nature of installation.

We do however, believe the investment case remains compelling for renewable energy investments and that the risks are potential investment areas investors should look out for. In addition, given the other factors (space exploration, intelligent infrastructure) influencing the sustainable investing theme, we think that the ETF may be useful as part of investors’ thematic or overall ETF portfolios.