Top ETF Picks for May 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

• Satrix FINI ETF
• Satrix RESI ETF

Foreign equity

• Sygnia Itrix MSCI Japan ETF
• Satrix MSCI World ESG Enhanced Feeder ETF
  

Bonds and cash

• FNB Government Inflation-Linked Bond ETF

Dividends

• CoreShares DivTrax ETF

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

April was a relatively quiet month in global markets as investors wondered if the banking crisis would spillover to the economy. Investors were also anticipating the Fed’s interest decision in early May. As a result, indices such as the MSCI World and S&P 500 made modest gains, rising 1.6% and 1.5% respectively. Locally, the JSE was up 2.1%.

Locally, manufacturing production data for February was released in April and showed a -6.1% in food and beverages year-on-year. Basic iron & steel, non-ferrous products, metal products and machinery declined 5.3%. Petroleum, chemical and rubber & plastic products declined 4.7%. These declines are the ramifications of the power outages and add upward pressure to unemployment.

Domestic equity: Satrix FINI (STXFIN) and Satrix RESI (STXRES) ETFs

Financial stocks are well-positioned to benefit from the high interest rate environment. Companies such as banks tend to profit from high interest rates because they charge high interest rates on loans, which increases their revenue. This makes the Satrix FINI ETF (2.7%)to be our first pick from the local ETFs. The underlying index of this ETF consists of companies involved in mortgage finance, consumer finance, specialised finance, corporate lending, investment banking, insurance and corporate lending.  

An attractive feature about this fund is that financial services companies pay regular dividends, which provide a steady stream of income. High interest rates increase net interest margins for financial companies that have a pool of cash. It is the only JSE-listed fund that tracks the financial sector, which helps justify its high total expense ratio (TER) of 0.43%. It has returned 23% over the last three years and 1.6% over the last five years. It is suitable for investors who want to benefit from the rising interest environment.

Our second pick is the Satrix RESI ETF (4.3%). This ETF invests in JSE-listed resource companies that are involved in general mining of gold and other commodities. Mining companies benefited from high commodity prices over the last few years, which enabled them to pay high dividends and higher taxes to the government. Gold surged 10.7% year to date on the back of a weaker dollar, recessionary fears and as a safe haven in the unfortunate event that the failure of Credit Suisse, Silicon Valley Bank and Signature Bank spreads to other banks and other economies.

If recessionary fears persist, gold might hold onto gains, which will benefit mining companies that are involved in gold. This ETF is the only JSE-listed fund that purely tracks the resources sector. It comes at a TER of 0.44% and has returned 29.2% over the last three years and 19.2% over the last five years. It is suitable for risk-tolerant investors as commodities tend to be cyclical

Satrix FINI (STXFIN) and Satrix RESI (STXRES) 

 Foreign equity: Sygnia Itrix MSCI Japan (SYGJP) and Satrix MSCI World ESG Enhanced Feeder (STXESG) ETFs

 Overseas, we favour diversified ETFs such as the Sygnia Itrix MSCI Japan ETF (3.5%) which aims to provide investors with exposure to large and mid-cap segments of the Japanese market. It invests in diverse sectors such as industrials, consumer staples, information technology, financials and healthcare. Various asset managers such as Lombard, Schroders and Invesco are bullish on Japan equities. Companies in the industrials sector have set

aside significant amounts of capital expenditure to ramp up automation, according to Invesco, a move that might potentially benefit investors over the long term.

 This ETF is suitable for risk-tolerant investors who want to diversify their portfolio outside of SA. The fund returned 12.4% over the last year and 7.7% over the last five years. It is the only JSE-listed fund that tracks the Japan market, which is probably the reason for its steep TER of 0.88%.

 Our second pick is the Satrix MSCI World ESG Enhanced Feeder ETF (5.9%). The sustainability financing gap or the capital amount needed to achieve the UN’s Sustainable Development Goals, increased 56% to $3.9tn in 2020, according to the OECD’s 2023 global outlook on financing for sustainable development. This suggests there is room for growth for ESG funds. The Satrix ETF is one of the simplest ways to gain exposure to ESG flows.

 This fund invests in securities of companies with the highest ESG ratings representing 50% of the market capitalisation in each sector of the MSCI ACWI Index. Companies invested in alcohol, gambling, tobacco, nuclear power, civilian firearms, fossil fuels extraction, thermal coal power and weapons are excluded. The fund has a reasonable TER of 0.34%, which is lower than the 0.38% that one would pay on Sygnia Itrix S&P Global 1200. It returned 11.72% over the last year and is suitable for investors who want exposure to the rise of ESG funds. 

Sygnia Itrix MSCI Japan (SYGJP) and Satrix MSCI World ESG Enhanced Feeder ( (STXESG) 

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Bonds and cash: FNB Government Inflation-Linked Bond ETF (FNBINF)

SA’s inflation appears to be sticky on the upside and the country remains vulnerable to external shocks that feed through its volatile exchange rate. As a result, our bond pick is the FNB Government Inflation-Linked Bond ETF (-0.1%). Inflation-linked bonds are designed to help protect investors from inflation. These bonds are indexed to inflation so that the principal and interest payments fluctuate with the rate of inflation. They offer additional benefits in a broader portfolio context.

SA bonds are attractive because they pay a premium for being rated as sub-investment grade. It is necessary for investors to pay attention to the growth of their investments along with the inflation rate. The fund has returned 10.3% over the last three years and 4% over the last five years. It comes at a TER of 0.36%, which is a bit higher than Satrix ILBI ETF’s 0.32%. It is suitable for investors who want to hedge against inflation. 

FNB Government Inflation-Linked Bond ETF (FNBINF)

Dividends: CoreShares S&P Global Dividend Aristocrats ETF (GLODIV) 

In January this year, the SARB governor argued that 2023 will be one of the most uncertain years. During uncertain times, we advocate for the CoreShares S&P Global Dividend Aristocrats ETF (2.3%), which has risen 12.5% over the last three years and 4.3% since inception (14 April 2014). It is suitable for investors who rely on regular income from investments. The underlying index has significant weighting to consumer staples, financials and energy. This ETF invests in high dividend-paying companies that are listed offshore. It has a TER of 0.57%, which is higher than the locally listed Satrix DIVI ETF’s 0.41%. 

Dividend stocks yield capital returns in addition to regular income, which makes them less volatile than the overall market. Because of their lower volatility, dividend stocks often appeal to investors looking for lower-risk investments.

CoreShares S&P Global Dividend Aristocrats ETF (GLODIV) 

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)