Top ETF Picks for April 2023

Each month, the investment gurus at Intellidex scan the market to come up with a list of their favorite ETFs. Learn more about their top picks this month here.

Domestic equity

• FNB Top 40 ETF 
• CoreShares Top50 ETF

Foreign equity

• Satrix S&P 500 Feeder ETF 
• Sygnia Itrix Euro Stoxx 50 ETF 

Dividends

• CoreShares DivTrax ETF

How did Intellidex come up with these picks? Here's what they have to say:

Various empirical studies conclude that the bulk of equity returns stem from diversification among broad asset classes rather than from individual stock picking. As such, our grouping is done with a diversified portfolio in mind, ensuring appropriate exposure to different asset classes. First, we group the ETFs according to the three widely recognised asset classes – equities, bonds and cash. We further split equities into geographic groupings, then add a category for equity ETFs with an income theme.

Our picks should provide an investor with a relatively diversified portfolio made up only of ETFs. However, asset allocation is not a one-size-fits-all concept. You need to make sure that weights of different asset classes in your portfolio meet your unique risk-and-return objectives. Multi-asset ETFs, which are already diversified among asset classes, are analysed as a separate category. 

As a rule of thumb, we like ETFs that follow a watertight investment philosophy. They should also be tax smart, which means they should qualify to be in a tax-free savings account. To avoid overconcentration, a good ETF should cap its exposure to a single sector and/or a single counter. While competition among providers is intensifying and ETF costs are coming down, we look at this metric closely and prefer ETFs with low total expense ratios (TERs). An overview of our favourite funds for each category follows.

Domestic equity: FNB Top 40 ETF (FNBT40) and CoreShares Top50 ETF (CTOP50) 

This month’s local picks emphasise our view that an allocation to SA equities should focus on top quality stocks which will offer more resilience in the challenging economic environment. Hence, we focus on the FNBT40 ETF (-0.8% in March) which invests in the 40 largest companies on the JSE. The objective is to offer returns to investors which are linked to the performance of the FTSE/JSE Top 40 index with the ETF tracking the component equities of the index in proportion to the index weightings. Dividends or interest earned from the underlying shares are paid on a quarterly distribution. Given the nature of the fund, inherent risks include general market and company specific risks. The fund has a competitive total expense ratio of 0.13%, which compares well to its peers, the Sygnia Itrix Top 40 (0.18%) and 1nvest Top 40 (0.29%), while it is slightly higher than the Satrix 40 at 0.10%.

Our second pick is the CoreShares Top50 ETF (-1.1%), which tracks the S&P South Africa 50 Index as closely as possible. We chose this one to enhance investors’ broad equity exposure to quality JSE stocks. Despite local challenges, we believe SA Inc still offers long-term value and dips in the local bourse provide buying opportunities. The index, which is constructed and maintained by S&P Dow Jones Indices, provides exposure to the largest 50 companies on the JSE by float-adjusted market cap and constituent weightings are capped at 10% (as at the quarterly rebalancing date).

Both our ETF picks have the benefit of both sector and geographic diversification, which should serve investors well. From a sector point of view, the funds are invested in basic materials, financials and consumer cyclicals with average exposures of 31%, 23% and 18% respectively. Based on our analysis, basic materials has outperformed all other sectors (including the all share index) in the SA market on a one-month (+28.5%) and six-month (+22.9%) period, despite declining commodity prices. While financials endured negative returns over one month (-4.6%), across six months the sector gained 12.8%. Taking note of the SVB and Credit Suisse issues, Intellidex South Africa CEO Roy Havemann says South African banks do not face the same risks as the US and European banks, with financial results confirming that SA banks are well-capitalised and profitable.

FNB Top 40 ETF (FNBT40) and CoreShares Top50 ETF (CTOP50) 

Foreign equity: Satrix S&P 500 Feeder ETF (STX500) and Sygnia Itrix Euro Stoxx 50 ETF (SYGEU)

Our first global equities pick is the Satrix S&P 500 Feeder ETF (-1.6%), an index-tracking fund listed on the JSE with a mandate is to track, as closely as possible, the value of the S&P 500 in rand terms. The S&P 500 index measures the performance of the large capitalisation sector of the US equity market which comply with size, liquidity and free float criteria. To replicate the index performance, the Satrix S&P 500 ETF invests in the iShares Core S&P 500 UCITS ETF (the underlying fund). The investment objective of the underlying fund is to provide investors with a total return, taking into account both capital and income returns, which reflects the return of the S&P 500 Index. 

The US is expected to grow 1.6%, 0.2 percentage points more than in the prior projection. The IMF cut its growth expectations for emerging markets and developing economies – which have a bigger weighting than advanced nations based on purchasing power parity – to 3.9%, 0.1 percentage point lower than its prior projection.

Our satellite, or higher risk pick, remains the Sygnia Itrix Euro Stoxx 50 ETF (+1.4%), which is a passively managed index tracking fund and is listed on the JSE as an ETF. The investment objective of the ETF is to track the Euro Stoxx 50 Index as closely as possible.

According to the S&P Global, the eurozone manufacturing PMI was at 47.3 points in March, falling from 48.5 in February to a four-month low. Even though this reflects worsening health of the region’s manufacturing sector, much of the month-on-month decline was due to the Suppliers’ Delivery Times Index (which is inverted in the calculation of the headline PMI) surging to a survey record. Nonetheless, key indicators measuring factory health such as output, new orders and employment were virtually unchanged in the period. Interestingly, the most solid performances were from markets such as Greece (with the strongest improvement) followed by Spain and Italy while headline PMIs for Germany and Austria declined to their lowest levels in about three years.

Satrix S&P 500 Feeder ETF (STX500) and Sygnia Itrix Euro Stoxx 50 ETF (SYGEU) 

Bonds and cash: FNB Inflation Bond ETF (FNBINF)

Given the likelihood of moderate or persistent inflation and our preference for diversification, our income pick is the FNB Inflation Bond ETF (+2.4%). The investment objective is to provide investors with a real rate of return above inflation (CPI) through exposure to a diversified portfolio of government inflation-linked bonds. 

The ETF invests in bonds based on the value issued by National Treasury and the listed value on the JSE. The ETF aims to track the performance of the FTSE/JSE IGOV Index. The IGOV is a weighted basket of South African government inflation-linked bonds. The ETF tracks the component bonds of the index in proportion to the index weightings. Inflation returns interest to investors quarterly. Despite this, investors should be cognisant that the fund is relatively expensive with a total expense ratio of 0.37%.

FNB Inflation Bond ETF (FNBINF)

Dividends: CoreShares DivTrax ETF (DIVTRX)

The CoreShares DivTrax ETF (0.0%) is our dividend pick for this month, which tracks the S&P South Africa Dividend Aristocrats Index. The index, which is constructed and maintained by S&P Dow Jones Indices, is designed to measure the performance of constituents of the S&P South Africa Composite Index that have followed a policy of increasing or maintaining stable dividends for seven consecutive years.  

As a benefit to investors, shares which are included in this ETF typically have a reliable track record offering consistent income to investors and looks at actual dividends instead of just dividend yields. Furthermore, companies which are consistent in paying out dividends usually have resilient fundamentals. However, investors should take note that this ETF is relatively expensive with a total investment cost of 0.56% and also has a high tracking error.

CoreShares DivTrax ETF (DIVTRX) 

New to investing and want to learn more about other ETFs?

Satrix Rafi 40 ETF (JSE:STXRAF) suits investors who want passive exposure to fundamental weighted equities over a long-term investment horizon.

Satrix FINI ETF (JSE:STXFIN) is suitable for risk-tolerant investors seeking exposure to emerging market equities.

Global REIT Index Feeder ETF (JSE:ETFGRE) suits investors who want passive exposure to global listed property over a long-term investment horizon.

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Background: Exchange-traded funds (ETFs)