Suitability: In our last three ETF notes we looked at specialist funds that invest in the three main subsectors of the JSE: financials, industrials and resources. In all three categories we selected NewFunds ETFs as our favourites because we liked the methodology used to construct their portfolios. The funds select constituents based on volatility first and then what it calls intrinsic value. This differs to typical index construction which usually weights companies based on market capitalisation (the total value of the company’s shares). The funds reviewed in the last three posts tend to be more volatile and hence will suit those investors who can stomach risk. But if you have low appetite for risk but still prefer the funds weighted by intrinsic value, then our focus for this week, NewFunds S&P GIVI SA Top 50, is an appropriate ETF for you. This ETF is more diversified than the specialist funds and is focused on the 50 largest JSE-listed companies.
What it does: From its inception to June last year, this ETF tracked the eRAFI Overall SA Index which was made up of the top 40 SA companies ranked by fundamental valuation metrics. After the eRAFI was discontinued, the fund started tracking the S&P GIVI SA Top 50, which represents the top 50 stocks from the S&P GIVI (Global Intrinsic Value Index) SA composite index of general equities. The approach selects the stocks assessed to have the highest intrinsic value and lowest volatility, subject to certain liquidity constraints. The intrinsic value of each stock is determined by its book value and its discounted projected earnings.
Advantages: With a portfolio of 52 companies that operate across the various sectors of the economy, the NewFunds S&P GIVI SA Top 50 is one of the more diversified pure equity ETFs on the market. Additionally, the intrinsic value weighting it uses has advantages for constructing a portfolio over the market-cap approach. Because the fund gives more weight to counters that have lower volatility, it also reduces the return variability.
Top holdings: While the fund is fairly distributed across its 52 constituents, consumer goods and financial stocks dominate the fund, accounting for about 68% of the holdings. This is expected given that the top five stocks on the JSE are consumer goods stocks.
Risk: Although the stock and sector diversity in the portfolio reduce the investment risk over the medium to long term, the ETF is still based on securities with inherent trading risks. The value of the investments will therefore rise and fall as markets fluctuate. Your capital is not protected.
Fees: The annualised total expense ratio (excluding brokerage and transactional cost) is 0.11%.
Historical performance: The fund’s performance depends on how you choose to invest – through a single lump-sum payment or regular instalments. A lump-sum investment mimics the index performance more closely and the performance report in the table below is for a lump-sum investment. The change in the underlying index starting from 1 June 2015 from eRAFI to S&P GIVI SA Top 50 resulted in drastic changes to the portfolio’s constituents. Most resource stocks were screened out of the top 10, which ended up being dominated by consumer stocks. Because of this, the fund’s historical performance may not have much bearing on its future performance.
Alternatives:
The closest alternative to NewFunds S&P GIVI Top 50 is the CoreShares Top 50. The fund, which was launched in May last year, tracks the same index as NewFunds S&P Top 50. Over and above these you can also consider a wide range of top 40 funds weighted by market cap:
Nedbank BettaBeta Equal Weighted Top 40
Ashburtorn Top 40 ETF formerly RMB Top40
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.
What are the benefits of ETFs?
- Gain instant exposure to various underlying shares 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
You can check out other ETF Tuesday posts here.
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