Performance review

After a string of losing months, April has turned out to be very positive for the Swix 40, ensuring it ends the month with a positive 1.87% return for the year to 25 April, assuming reinvestment of dividends. Those figures are drawn from etfSA because Satrix has not yet made its fund factsheet available for the latest period.

Outlook

Equities are driven by general economic activity and, over long periods, have proven their ability to provide investors with growth ahead of other investment classes. SA’s economy has performed poorly recently and the equities market has suffered, remaining largely flat since mid-2014. Recent political developments which led to the downgrade of SA’s credit rating to junk status are likely to add pressure to an already struggling economy. Bond yields have already risen and the rand, despite its recent recovery, is still below its levels prior to the firing of Pravin Gordhan as finance minister. However, the significant foreign exposures in the fund benefit from rand weakness, and often involve regions where economic growth is faster than SA’s.  

Suitability

The Satrix Swix ETF suits investors with a medium- to long-term investment horizon. It is particularly attractive to South African investors because it reduces exposure to resource stocks which tend to dominate general equity indices. Since mining forms a big part of SA’s economic value, having an investment portfolio with a lower exposure to resources makes for a more diversified portfolio. Its consists of the 40 biggest JSE-listed companies, so it makes for a good core investment portfolio. 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.

What it does

The fund tracks the value of the FTSE/JSE Swix Top 40 index. The Satrix Swix 40 fund exposes investors to the price performance of the FTSE/JSE Swix Top 40 index and pays out, on a quarterly basis, all dividends received, net of costs. Constituent companies are weighted according to market value, which means the price movement of a larger constituent company will have a larger effect on the value of the index than that of a smaller company. However, this index differs from the standard top 40 index in that it only considers the market capitalisation of companies that are held on the JSE register.
By considering the JSE register only, it means that dual-listed stocks (which includes many resource companies) are downweighted because a significant portion of their shares are held offshore.

Top holdings

The top 10 holdings of this ETF make up 60% of the fund. The biggest one, Naspers, constitutes 23.4%%, which diminishes the diversification benefits one usually obtains with ETFs.

Risk

In addition to being a 100% investment in equities – which is a riskier asset class than bonds or cash – its weighting methodology introduces idiosyncratic risk due to big exposures in heavyweights such as Naspers.

Alternatives

Its closest peers are the NewFunds Swix 40 and Stanlib Swix ETF, where differences in performance over time are largely attributed the funds’ total expense ratios (TERs) and, to a lesser extent, the timing of the fund’s reconstitution. The TER for both these funds is 0.33% against 0.5% for the Satrix ETF.

Other non-Swix ETFs which track the JSE’s top 40 companies are Stanlib Top 40 (total expense ratio: 0.25%) and Ashburton Top 40 (total expense ratio: 0.18%). Another fund that eliminates the concentration exposure problem that the Satrix fund has with Naspers, for example, is the Coreshares Top 40 Equally Weighted ETF (TER: 0.29%). This fund invests in the top 40 companies in equal proportions of 2.5% each.

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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