Know your ETF - The Absa NewFunds ILBI ETF

The Absa NewFunds ILBI ETF

Inflation is causing headaches for monetary policymakers, businesses and consumers alike locally and internationally as it eats into purchasing power, profit margins and disposable incomes. A small, open economy that is a net importer of manufactured goods, such as SA, is always vulnerable to inflationary pressures that feed through the volatile exchange rate.

 

It is necessary for investors to pay attention to the growth of their investments along with the inflation rate. On the power supply issue, it does not seem that electricity prices will ease anytime soon. This comes at the back of Eskom applying to the National Energy Regulator of SA for a tariff increase of 32% for 2023. If granted, prices might stay elevated in the long term.

Inflation-linked bonds are designed to help protect investors from inflation. These bonds are indexed to inflation so that the principal and interest payments fluctuate with the rate of inflation. They offer additional benefits in a broader portfolio context. Headline inflation eased slightly to 7.6% year-on-year in August, from an over 13-year high of 7.8% in July. Food and non-alcoholic beverages, housing utilities and transport were among the biggest contributors to the high inflation rate, contributing 1.9, 1.0 and 2.9 percentage points respectively. Core inflation rate, which excludes volatile items such as food and energy, slowed to an annualised rate of 4.4% from 4.6%. This is the SA Reserve Bank’s preferred measure of inflation and is comfortably within the target range of 3-6%.

Low and stable inflation is beneficial for stock markets, governments, financial services providers and households. This is because most financial products are somewhat linked to inflation, thus providing certainty. Governments often borrow at the rate of inflation, which if elevated can open the door to ballooning debt.

The NewFunds ILBI ETF tracks the performance of the Barclays/Absa South African Government Inflation-Linked Bond Index. It has a low tracking error and total expense ratio of 0.10%-0.35% respectively.

Fund suitability  

  • This ETF is ideal for investors who seek to protect their portfolio from inflation risks and volatility.

Fees 

  • The fund has a total expense ratio of 0.50%.

Top holdings

  • The ETF holds bonds issued by the National Treasury.

The Absa NewFunds ILBI ETF (JSE:NFILBI)

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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.

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