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Retirement and your ETF portfolio

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Intellidex ETF Picks

Investing for your future is here and this months’ Intellidex newsletter is focussed on an ETF portfolio that is retirement-focused, check it out!

While SA’s economic hardship is a structural impediment that needs to be overcome to boost both gainful employment and retirement, improving customer understanding of the investment products available is another way of boosting retirement savings, particularly among those who may be able to, but are sceptical about potential investment products available for retirement investment.

As such, our goal is to discuss some ways and products that may be useful as methods and tools to invest for retirement using an ETF portfolio. In addition, our focus will include bulking up on offshore allocations, especially on the back of the rand’s recent resilience. This is despite recent volatility and global uncertainty owing to Russia’s war against Ukraine.

Intellidex list of ETF picks:

Domestic Equity

Satrix Capped All Share ETF (STXCAP) and Satrix FINI (STXFIN)

Strong commodity prices and the rand’s resilience drove returns on the local stock exchange. The FTSE/JSE All Share Index increased 2.4% and the Top 40 index similarly rose 2.7%. The resources index accelerated 14.5%. While too early to predict, we believe that “risk-on” sentiment may recover provided that the situation between Russia and Ukraine is resolved. This would boost sentiment towards emerging markets, including SA.

It is, however, close to impossible to make an allocation to SA equities without attention to the Naspers/ Prosus pair. Both shares lost more than 20% in February due to Prosus’ exposure to Russia – it owns the second-largest classifieds business, Avito, and has a 25.7% stake in VK Group (through Prosus), which owns VKontakte, Russia’s most popular social media site.

While investors such as major oil players BP and Shell have pulled their investments from Russia, Prosus indicates that it is too early to make a permanent decision on its Russian assets. Investors in Naspers/Prosus have endured a lot of pain from holding the pair, first through China’s regulatory tech crackdown and now through the Russian invasion.

Given this backdrop, we would retain our pick from last month, being the Satrix Capped All Share Index (+2.6%). The ETF caps exposure to all constituents at 10%. This will allow for broad exposure to SA equities across large, mid, and small caps while limiting exposure to the strong run in mining companies and the negative sentiment surrounding Naspers/ Prosus.

Our second pick is the Satrix FINI ETF (+3.4%). High oil prices and the potential for supply chains to be further strained will lead to higher inflation, which may be followed by more hawkish central bank action. While Intellidex economists still expect three 25-basis-point hikes in the repo rate for the rest of the year, higher-than-expected inflation may lead to further hikes that are positive for the bank’s net interest margins. The ETF has a slightly high TER of 0.43% but is dominated by SA’s commercial banks that made up 65% of the ETF in January.

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Foreign Equity:

MSCI World ESG Enhanced Feeder (STXESG) and Sygnia Itrix FTSE 100 (SYGUK)

Global markets remain on edge and volatility is likely to persist in the short term. However, SA-based investors can bulk up on their offshore exposure given the rand’s resilience. Because Russia is a key supplier of oil and gas to Europe, global asset manager Schroders does not expect significant sanctions on Russian energy supply. However, if conditions were to worsen, global asset manager Schroders expects investment in alternative energy sources to accelerate, especially due to the already tight oil and gas markets before the war, meaning that current conditions could widen deficits further than predicted.

This increases the urgency of accelerating renewable energy capacity investment globally. Bloomberg expects ESG assets under management (AUM) to reach $53tn by 2025, representing almost a third of the forecasted total global AUM of $140.5tn in the same year. The MSCI World ESG Enhanced Feeder ETF (-2.8%) provides an opportunity for investors to buy the dip (down 13% year-to-date) in global equities while positioning portfolios for investment in companies that are aligning their business models to environmental, social, and governance factors. The ETF, which has a total expense ratio (TER) of 0.31%, tracks the performance of the MSCI World ESG Enhanced Focus CTB Index. The index maximizes exposure to ESG factors and companies that are reducing carbon equivalent exposure to carbon dioxide by 30%.

We also retain a pick from last month – the Sygnia Itrix FTSE 100 ETF (-1.2%). While the UK is also dependent on Russian gas for 6% of its energy needs, this is relatively lower than in Europe. In addition, the higher gas and commodity prices would have benefited energy companies in this ETF. Persistent inflation will hurt consumers though, as well as businesses that fail to pass on costs. However, financials are still expected to benefit from the resultant rate hikes due to higher inflation.

Overall, though, this value-based ETF remains positioned for any recovery in sentiment and economic growth, should the Russia-Ukraine crisis be resolved. The fund is quite costly though, with a total investment cost of 0.88%.

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Bonds and dividends/income:

Satrix ILBI (STXILB) and CoreShares Preftrax (PREFTX)

While the prospect of higher interest rates relative to inflation (positive real yields) and SA’s relatively better fiscal position may point to a nominal bond allocation, higher-than-expected inflation remains a risk. SA’s latest annual inflation rate of 5.7% in January was driven largely by transport and fuel-related costs. The war has subsequently caused a spike in oil prices (Brent crude oil finished February at $100/barrel) which we expect to negatively affect global trade and supply chains.

As a result, we retain our bond-ETF pick from last month. The Satrix ILBI ETF (+3.4%), which has a TIC of 0.25%, is the cheapest of the two inflation-linked bond ETFs listed on the JSE. Inflation-linked bond coupon payments keep up with price increases as the principal value of the bond is adjusted for inflation. As a result, investors are guaranteed a return above inflation, especially if bonds are held to maturity.

In addition, income generation is quite useful during times of market distress and volatility. As such, our pick for the income-oriented investor is the CoreShares PrefTrax ETF (+1.5%). The fund provides investors with income from preference dividends, which are charged at a lower tax rate than interest income, making them relatively tax efficient. This is particularly useful for investors with a high marginal tax rate. It is expensive though and will set you back 0.64% (total investment cost). The ETF is dominated by SA’s well-capitalized commercial banks, with the top three positions in the fund held by banks and amounting to 66% of the fund.

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Informed decisions

As most EasyEquities, investors would know, ETFs trade like shares and replicate, rather than outperform the chosen index. This implies that investors generate the return of the market, which can be pleasing when the index value increases and displeasing when the index value declines.

However, another advantage of ETFs is that they’re cheaper than actively managed unit trusts, which means less loss of the value of your investment over the medium to long term due to fees.

Importantly, tax-free savings accounts are also quite useful investment tools, as you can invest in your preferred unit trust or ETF as part of a TFSA. TFSAs allow investors to invest up to R36,000 each year and up to R500,000 over the life of each account, with all capital gains below the annual and lifetime thresholds being free of taxation.

Our list of favored ETFs is made with a diversified portfolio in mind. In particular, global conditions make it unclear which factors will dominate global markets in the medium term, which implies staying the course.

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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.