This low risk fund outperformed equities during the period after the JSE had a difficult year. The fund invests in money market instruments, which are similar to deposits in a bank, so there is always a positive return connected to market interest rates. Because it was a tough period for equities, this meant the NewFunds Traci 3-Month ETF outperformed, returning 7.18% over the past year. That beat inflation, which averaged 6.13% over that period, in line with other fixed interest-type investments. The all bond index returned 11.18% while the CoreShares Preftrax ETF that tracks preference shares returned 7.61%.
The strong performance by fixed interest securities came in a turbulent period for interest rates amid concerns over South Africa’s fiscal management. The downgrade of SA’s sovereign rating to junk status in April ensured that interest rates would increase in SA. That has only just begun to be felt in the money market, but should be a strong theme in the year ahead with the risks definitely in favour of higher rates.
Outlook: NewFunds Traci invests in negotiable certificates of deposits (NCDs) which are deposits for three months. The NCDs can be traded on the secondary market.
The firing of finance minister Pravin Gordhan had an immediate impact on interest rates. In the near-dated end of the market, where this fund is focused, interest rates leaped up from around 7% to around to 8%. Because the fund is in relatively short dated instruments of three months, it can access the higher yield in the market quite quickly. So the fund exhibits low interest rate risk. That is not true of longer-term bond funds which can invest in instruments of up to 30 years in duration. An unexpected increase in market interest rates is highly negative for such funds because they have long term fixed exposures, although inflation-linked bonds help to protect against some of this risk. This is why longer-term bond funds are currently yielding returns of around 11%, indicating that the market is expecting short term rates to increase in the years ahead. Interest rates in the NCD market will be affected by credit ratings and the Reserve Bank’s interest rate policy. Because of the downgrade of government’s bonds, yields are almost certainly going to increase, while a weak currency could trigger inflation which would similarly drive the Bank’s policy rate up.
In our view, the outlook for interest rates is highly uncertain. South Africa’s macro-economic policy since the firing of Gordhan is now unreliable. Further downgrades could lead to sharply higher interest rates, particularly in losses in state-owned enterprises continue while government spending remains high. On the other hand, the political environment could suddenly change, which may lead to a much-improved outlook for interest rates. If bullish on the politics, you would want to be in long-dated bond funds, but if you are bearish, you would want to be in this short-dated fund. We’re leaning toward bearish, so think this fund is a good option to have the safety of a deposit-like investment without being stuck with long term fixed yields.
This ETF is likely to appeal to conservative investors seeking low-cost, liquid alternatives to traditional cash-based investments such as fixed deposits. It may also work well as the cash tranche within a multi-asset portfolio.
What it does
The Traci fund tracks the total return version of the Barclays/Absa Tradable Cash index (Traci 3-month). The index is constructed so as to track the overnight, three-month SA money market deposit rate. The TRACI index measures the mark-to-market value (the quoted price in an active market) of the income earned from rolling a three-month money market deposit monthly. Interest received is reinvested into the fund to increase the net asset value of each unit.
This ETF is a good option for retail investors who might not have the R1m normally required to invest directly into money market instruments, while obtaining higher yields than traditional call deposits or savings accounts. Additionally, the fund’s diversified portfolio reduces credit risk, and Absa acts as a market maker, making it easy for unit holders to buy or sell the ETF.
Top holdings: NewFunds Traci invests in high quality NCDs issued by the country’s top banks. More than two thirds of the fund is invested in NCDs issued by Barclays, Nedbank and Investec. The balance is in cash and NCDs issued by FirstRand and Standard Bank.
Fees : Total expenses take 0.24% from the fund each year. That equates to R2.40/year on an investment of R1,000. However, that charge excludes other fees one may incur when buying or selling shares in this ETF.
There are no listed alternatives to NewFunds Traci. But investors can use other low-risk ETFs such as those that tracks bonds and preference shares. For those that do want a long-term bond fund, the Newfunds Govi tracks government bonds. The Satrix Ilbi tracks inflation-linked bonds, which provides protection against inflation and therefore indirectly against surprise interest rate moves.
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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