Top ETF Picks for December

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

• CoreShares Top 50 (CTOP50)

• CoreShares Total World Stock Feeder (GLOBAL)
• Sygnia Itrix MSCI Emerging Markets 50 ETFs (SYGEMF) 

Bonds and Cash

• Satrix SA Bond ETF (STXGOV)

Dividend or Income-focused

• CoreShares S&P SA Dividend Aristocrats ETF (DIVTRX)

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 recognized asset classes – equities, bonds and cash. We further split equities into geographic groupings, then add a category for equity ETFs with an income theme.

What's in it for EasyVSTRs?

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 analyzed 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 favorite funds for each category follows.

Domestic equity

• From an equities perspective we start with rand hedges, with the most prominent being Naspers and Prosus. The pair returned a sizeable 38.7% and 40.5% off a very low base in November. Local fund manager Anchor Capital expects China-based gaming giant Tencent’s performance to be further driven by internal factors such as asset sales, restructuring and prudent capital management.
  
  
• Tencent, which is 28% owned by Naspers through a 43% holding in Prosus, is the group’s main asset held alongside other high growth tech-education and e-commerce businesses. As such, Anchor’s strategic expectations imply that revenue growth does not need to be significantly high to drive earnings and cash flow at Tencent. Also, given that Naspers is expected to slowly sell down a portion of its stake in Tencent to drive shareholder returns, Anchor is positive on the investment case of both companies.
  
  
• Anchor is also relatively positive on “SA Inc” with forward multiples being quite low and earnings expectations being moderate against a weak economic backdrop. Importantly, we believe that the low multiples provide a margin of safety when investing in SA. As a result, we think broad exposure through the CoreShares Top 50 ETF (+12% in November) would be a good core equity ETF holding.
  
  

CoreShares Top 50 (CTOP50) 

• Emerging markets have come under significant pressure over the last 18 months. The MSCI Emerging Markets index was down 16% year-to-date by end-November.  However, China’s recent announcement of reduced lockdown restrictions should enable a better focus on the economy. Given the global economic slowdown, we also believe that gradually opening the economy will lead to more domestic activity in China, which would support company performance, earnings growth and share prices. Importantly, emerging market equities are quite cheap.
  
  
• Global fund manager JP Morgan’s proprietary valuation composite for emerging markets, which includes price-to-earnings, price-to-book and price-to-cash flow ratios, as well as dividend yield show that the asset class is trading significantly below its long-term average. Emerging market equities are also cheap relative to global equities.
  
  
• As such, our satellite pick is the Sygnia Itrix MSCI Emerging Markets 50 ETF (+10.3%). The ETF tracks the performance of the MSCI Emerging Markets Investable Market Index (IMI). The index captures large, mid and small cap representation across 24 emerging markets (EM) with 3,207 constituents, covering approximately 99% of the free float-adjusted market capitalization in each country.
  
  

CoreShares Total World Stock Feeder (GLOBAL) & Sygnia Itrix MSCI Emerging Markets 50 ETFs (SYGEMF) 

• Consequently, our pick is the Satrix SA Bond ETF (+4.2%) which we think would be useful for portfolio diversification purposes. However, the recent spike in bond yields owing to load-shedding and the political fallout surrounding President Cyril Ramaphosa is a reminder that government bond yields and prices are sensitive to local political developments.
  
  
• As such, the ANC leadership contest outcome at its elective conference next week and SA’s fiscal policy in the lead-up to the 2023 budget and 2024 elections will have an influence on bond price movement.
  

Satrix SA Bond ETF (STXGOV)

Dividends: CoreShares S&P SA Dividend Aristocrats ETF (DIVTRX)

• The CoreShares S&P SA Dividend Aristocrats ETF (+14.2%) is our pick for this month. We think that adding high dividend yield funds to ETF portfolios can be beneficial as a simple decomposition of the all share index’s annualised 8.6% return over the last five years to end-November shows that the price proportion of return was 4.6% and that the income return from dividends was 4%.
  
  
• With dividends/income making up almost 50% of the total return of the market, the simple decomposition of the all share index total return highlights the importance of dividends as part of an investor’s returns. Furthermore, academic studies both locally and abroad find a strong relationship between dividends and the performance of share prices, further augmenting the usefulness of dividend yield as part of a portfolio strategy.
  
  

  CoreShares S&P SA Dividend Aristocrats ETF (DIVTRX)

New to investing

and want to learn more about other ETFs?

Read: Intellidex Analysis: Top Fund Picks for November

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Background: Exchange-traded funds (ETFs)