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.
Domestic equities
Bonds and cash
Dividends
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.
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 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: CoreShares Sci-Beta Multi-Factor (SMART) and Satrix Rafi 40 ETFs (STXRAF)
This month’s local picks emphasise our view that an allocation to SA equities must be diversified given the local economy’s weak prospects. Accordingly, the CoreShares Sci-Beta Multi-Factor ETF (-2.4% in February) exposes investors to six investment styles (also known as factors). The styles - which have been proven to influence the returns of stock prices - include value, size (medium capitalisation), low volatility, momentum (high), high profitability and low investment (high cash flow) within the SA equities universe.
The value of diversifying across styles is that academic research finds that favouring a particular style (eg value, which favours shares that appear to be trading lower than their estimated intrinsic or book value but with relatively attractive prospects) leads to outperformance over the long-term but at the cost of short-term periods of high volatility.
This is problematic for low-risk equity investors that may sell their holdings, thereby guaranteeing losses. One drawback of the fund is that it costs 0.72%. However, we believe that part of the costs reflects the specialised nature of its index.
Our second pick is the Satrix Rafi 40 ETF (-2.7%) which ranks firms using sales, cash flow, dividends and book value, instead of market capitalisation. The ETF, which we covered in-depth in an ETF research note recently, exposes investors to the long-term fundamentals of companies, rather than market sentiment. Its index, which is also specialised, contributes to its 0.59% total investment cost.
However, our two ETF picks above are linked though fund exposure to basic materials, which averages 32%. With China’s reopening well under way (the Caixin Manufacturing PMI increased to 51.6 in February – the first reading over 50 in seven months), local fund manager Anchor Capital expects China’s commodity and consumer demand to be a key driver of the JSE’s 2023 returns.
Both funds have healthy exposure to the consumer discretionary (think Richemont) and technology (think Naspers/Prosus) sectors. Also, JP Morgan expects the consumer sensitive sectors to recover followed by the longer-term themes such as the green economy and advanced manufacturing sectors which bodes well for the funds’ basic materials exposure.
CoreShares Sci-Beta Multi-Factor (SMART) and Satrix Rafi 40 ETFs (STXRAF)
Foreign equity: CoreShares Total World Stock Feeder (GLOBAL) & Sygnia Itrix Euro Stoxx 50 ETFs (SYGEU)
Our first global equities pick is the CoreShares Total World Stock Feeder ETF (+3.5%), which we think of as a core holding for diversification purposes. The ETF provides exposure to global equities by tracking the performance of the FTSE Global All Cap Index. It tracks the index by investing in the Vanguard Total World Stock ETF, making it a feeder ETF.
It covers large, mid and small cap equities across developed and emerging markets, thereby maximising local ETF investors’ exposure to global equities. As such, we believe this is good for diversification purposes. One of the fund’s strongest points is its relatively low total expense ratio of 0.28%, which compares well to the Sygnia Itrix MSCI World Index (0.69%), 1nvest MSCI World Index Feeder (0.40%) and Satrix MSCI World Feeder (0.35%) ETFs.
Our satellite, or higher risk pick is the Sygnia Itrix Euro Stoxx 50 ETF (+5.8%). Higher energy prices owing to the Russia-Ukraine conflict have caused a surge in inflation in the EU. This led to central banks hiking interest rates to deal with the sharp price increases. Euro Area consumer inflation has since moderated to 8.5% annually in February (8.6% in January) from its peak of 10.6% in October last year.
Global fund manager Goldman Sachs expects the EU to avoid a deep recession, despite the negative effects of rising prices and higher interest rates on consumers and economic activity. It reports (2023 outlook) that the EU had cut Russian gas imports by 80% and total gas consumption by 20-25% towards the end of last year, supported by an unusually warm winter.
Goldman Sachs also reports that easing supply chain blockages has enabled EU giant Germany to replace energy-intensive industrial production with chip-intensive production. Finally, it expects pent-up demand and consumer credit capacity (which although lower than in the US) to support an economic recovery in the EU over the medium term. The Euro Stoxx 50 index traded at a forward price:earnings ratio of 12x and a forward dividend yield of 3.3% as at end-January. As such, we believe that this provides a reasonable margin of safety for higher-risk investors who may consider the Sygnia Itrix Euro Stoxx 50 as part of their overall ETF portfolio.
CoreShares Total World Stock Feeder (GLOBAL) & Sygnia Itrix Euro Stoxx 50 ETFs (SYGEU)
Bonds and cash: 1nvest Global REIT Index feeder ETF (ETFGRE)
Given the likelihood of moderate or persistent inflation and our preference for diversification, our income pick is the 1nvest Global REIT Index Feeder ETF (+2.5%). An allocation to global listed property/Reits is useful as they provide inflation protection during high and moderate inflationary periods, according to data from the US-based National Association of Real Estate Investment Trusts (Nareit).
Investment returns from REITs also have a lower correlation with returns from the broader equities market. This increases the likelihood of one asset class outperforming when another underperforms, which is positive for investor portfolios. As such, data from the SA REIT Association indicate that the correlation between SA REITs and the Top 40 index was 0.4. Importantly, this was measured over a 10-year period (to end January 2023), which shows the potential benefits of low correlation over the long term.
1nvest Global REIT Index feeder ETF (ETFGRE)
Dividends: Satrix Divi Plus ETF (STXDIV)
The Satrix SA Divi Plus ETF (-5%) is our dividend pick for this month. The fund tracks the performance of the FTSE/JSE Dividend+ Index, which selects the top 30 stocks by a one-year forecasted dividend yield. The constituents’ weightings within the index are determined by their dividend yield as opposed to market capitalisation.
This provides a forward-looking estimate of expected dividends, which is advantageous relative to peer indices that may use trailing dividend yield measures. However, the risk of forecasting error may be a disadvantage to investors when investing in the ETF. In addition, it is also relatively expensive with a total investment cost of 0.62%.
Satrix Divi Plus ETF (STXDIV)
New to investing and want to learn more about other ETFs?
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
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.