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TFSA Season Diversified

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Intellidex ETF Picks

With market uncertainty and geopolitical tensions reaching a new high point, the importance of diversifying and protecting your investment portfolio steps back into the spotlight.

3 ETF Picks for Diversification and Protection:

Bonds and Cash funds:

Satrix ILBI ETF (STXILB)

High inflation rates have been more persistent than most market participants expected. And with the Fed expected to hike interest rates to cool down the US economy, inflation may subside.

At Intellidex, our economists forecast annual headline inflation in SA of 5.3% in 2022 before it moderates to 4.7% in 2023. Our baseline forecast is for three more 25 basis point hikes in the repo rate by the South African Reserve Bank after the first 25 basis points increase in late January, which will lead to slowing local inflation.

This implies limited upside for inflation-linked bonds (ILBs), that adjust their principal values and subsequent coupon payments in line with inflation. However, we believe that an allocation to the Satrix ILBI ETF (-2.2%) may still be useful as this may offset some of the value lost from increasing interest rates (given the inverse relationship between bonds and interest rates).

In addition, adding bonds to an overall portfolio improves diversification, given its negative correlation with equities. The fund remains the cheapest of its kind in SA, with a TIC of 0.25%.

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Dividend/Income:

CoreShares S&P Global Dividend Aristocrats ETF (GLODIV)

Our pick for the income-oriented equity investor is the CoreShares S&P Global Dividend Aristocrats ETF (-8.2%). Its strategy of investing in companies with a history of increasing or stable dividends is attractive. It is also relatively well-diversified, with 108 companies in the fund and not one share exceeding 1.0% of assets.

However, it is expensive, with a TIC of 0.65% and an unattractive dividend yield of 1.5%, which we ascribe to the pandemic’s effect on dividend payouts. However, this may increase as economies and earnings subsequently recover. It also has a healthy 66% exposure to value sectors, which are typically well-established, cash-generative businesses that pay decent dividends.

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Property Funds

Sygnia Itrix Global Property ETF (SYGP)

Investors wanted more exposure to listed property after the pandemic-induced sell-off in 2020 and as a result, the local FTSE/JSE Listed Property Index had a strong 2021, returning 25.7%. However, the index remains well below-pre-pandemic levels, and the recovery in 2021 came off a very low base due to the severe underperformance of the sector in the few years leading up to the pandemic.

Hotel and leisure property demand is driven by business investment and population and wage growth; in the industrial property sector, business investment and increased employment similarly spur demand. Retail properties have similar catalysts for demand, including increased consumer spending, which is a function of high wage growth.

The Sygnia Itrix Global Property ETF tracks the performance of the S&P Global Property 40 Index, which requires companies to have a minimum market capitalization of $1bn. In addition, a Reit must have generated positive earnings and paid a dividend in the last financial year to retain inclusion in the index.

Sygnia Itrix Global Property has a total investment cost of 0.26% and we estimate its dividend yield at 1.8%. Overall, we believe that global property exposure as part of an overall portfolio has both income and diversification benefits.

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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.