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What is your investment horizon? Medium to long term?

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Suitability:  The NewFunds Swix 40 ETF is ideal for investors with a medium- to long-term investment horizon. This fund invests in the 40 largest blue-chip companies on the JSE. Equity investments tend to exhibit higher short-term volatility than other asset classes, so a longer investment horizon gives a portfolio time for returns to accumulate ahead of volatility.

There are two primary weighting methods used in creating funds that invest in the 40 biggest companies on the JSE. The most established method is a straightforward market-cap weighting approach. Companies are held in a fund in proportion to their total value. The Swix weighting, however, only considers the free-float market capitalisation of companies that are held on the JSE register. This means companies that are listed on the JSE but mostly traded on other markets such as London are held in a relatively lower proportion.

Swix-weighted funds tend to reduce exposure to resources/basic materials compared to a standard weighting. This might be a good fund for South African investors because our economy has a sizeable exposure to resources and this is a way of managing or reducing that exposure. Investment theory is built on the idea of reducing correlation across an investor’s wealth overall. Because we are inevitably exposed to the SA economy, having an investment portfolio.

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What it does: The NewFunds SWIX 40 ETF tracks the FTSE/JSE Shareholder Weighted (Swix) Top 40 Total Return Index. By considering the JSE register only, it means that dual-listed stocks are down-weighted because a significant portion of their shares are held offshore. Many resource companies are dual-listed and that is how exposure to them is reduced in Swix funds. A free-float adjusted market capitalisation format is based on the market capitalisation of each company excluding locked-in shares such as those held by holding companies, founders and governments. The ETF is therefore more representative of the universe of shares actually available to South African investors.

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Top holdings: The top 10 holdings of this ETF include three companies not found in the non-Swix top 40 fund (Old Mutual, BHP Billiton and Richemont). Overall, the Swix weighting has a greater proportion of financials and consumer services whereas the non-Swix weighting has a markedly increased proportion of basic materials and consumer goods.

Risk:  The fund is disproportionately overweight in Naspers which reduces diversification benefits. Furthermore, this is a 100% investment in equities, which is a riskier asset class than bonds or cash. However, the returns over time should compensate for volatility. Also, constituent companies have diversification benefits because they operate in several jurisdictions and varied sectors, which diminishes risk to a degree.

 

 

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Fees

The NewFunds Swix 40 fund has a total expense ratio (TER) of 0.33%

Historical performance

Since its establishment in 2012, the fund has recorded an annualised return of 10.3%.

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Fundamental view

The value of a broad equities portfolio is driven by general economic performance as well as the sectoral allocation. The outlook for SA’s economy is currently weak; the IMF now expects 2016 GDP growth to come in at 0.1%. However, the bulk of the top 40 companies have operations beyond SA where economic growth is better.

Alternatives

Alternative funds are the Satrix Swix 40 and Stanlib Swix 40.

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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 more than one company in a single transaction. ETFs can be traded through your broker the same way as shares, say, on the Easy Equities platform. In addition, it qualifies 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 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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