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.
- Absa NewFunds Low Volatility (NFEVOL)
- Satrix FINI (STXFIN) ETFs
- Satrix MSCI China (STXCHN)
- Satrix MSCI Emerging Markets (STXEMG) ETFs
Bonds and Cash
- Satrix ILBI (STXILB)
Dividend or Income-focused
- CoreShares S&P Global Dividend Aristocrats ETF (GLODIV)
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 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: Absa NewFunds Low Volatility (NFEVOL) and Satrix FINI (STXFIN) ETFs
While inflation is showing signs of abating, risks remain tilted to the upside. SARB governor Lesetja Kganyago recently stated that SA inflation expectations are more uncertain than ever, citing the weaker rand and surging oil prices. This suggests that monetary policy might be restrictive until inflation comes back to the midpoint of the target range. As a result, we advocate for the Satrix FINI ETF (2.9%). The underlying index consists mainly of financial companies. Financials such as banks and insurers are well positioned to profit from a high interest rate environment because they generally have a sizeable amount of cash on their balance sheets or are able to lend to customers at higher interest rates. The fund comes at a TER of 0.43% and it is the only JSE-listed ETF which invests solely in financials. While sentiment is quite bearish on SA, our banking and insurance sectors rank as one of the best by global standards due their respective safety and soundness."
Absa NewFunds Low Volatility (NFEVOL) and Satrix FINI (STXFIN) ETFs
Foreign equity: Satrix MSCI China (STXCHN) and Satrix MSCI Emerging Markets (STXEMG) ETFs
"We remain bullish on the Satrix MSCI China ETF (14.0%) as we did in the previous newsletter. China’s reopening saw the country’s major equity indices soaring higher. This ETF has a significant weighting to the information technology and consumer discretionary sectors, which tend to be sensitive to economic changes and have great upside potential. China continues to offer diversification benefits to a broader portfolio given its domestically focused policies, consumer size and manufacturing capacity. Major investment banks such as Goldman Sachs and Morgan Stanley have revised upward their views and expectations on Chinese equities, with an upgrade from Morgan Stanley to overweight while Goldman Sachs is forecasting double digit growth on the MSCI China Index.
- The Lunar New Year break drew to a close towards the end of last month and markets were concerned about Covid infections spiralling out of control. This implies that the reopening might not be fully priced in as some uncertainty lingers. This is the only JSE-listed ETF which tracks the MSCI China Index. It has a portfolio size of R1.1bn and a steep TER of 0.63%. It is suitable for long-term investors who can stomach volatility.
Our second pick is the Satrix MSCI Emerging Markets ETF (10.2%) for investors who want to trim their exposure to Chinese equities. This ETF holds a diversified portfolio of stocks in different countries that have the potential to benefit from the Chinese reopening. China is a major trading partner to virtually all other emerging market economies and accounts for about one-third of market capitalisation in most emerging market indices, according to Morgan Stanley. As a result, investors place great emphasis on the country when allocating capital. In addition, the bank believes the market is underestimating the implications of the reopening. Morgan Stanley is bullish on China and remains optimistic about spillover effects to emerging market economies that are exporters of commodities. The reopening in manufacturing will amplify demand for oil as China relies heavily on the commodity for manufacturing. Manufacturing will also boost demand for precious metals such as gold and platinum, in which emerging markets play a crucial role."
Satrix MSCI China (STXCHN) and Satrix MSCI Emerging Markets (STXEMG) ETFs
Bonds and cash: Satrix ILBI (STXILB)
"Although inflation appears to be cooling down, its risks remain to the upside as a result of global supply chain disruptions, among other things. SA inflation is vulnerable to external shocks that feed through its volatile exchange rate. As a result, our bond pick is the Satrix ILBI ETF (0.1%). We continue to favour SA bonds as 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 Chinese reopening will amplify global demand for oil and send brent crude prices higher, which will result in elevated prices. Indeed, Morgan Stanley forecasts Brent crude oil to rise to $107/bbl from the current level of $85/bbl by 2023-end.
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."
Satrix ILBI (STXILB)
Dividends: CoreShares S&P Global Dividend Aristocrats ETF (GLODIV)
"In an uncertain earnings environment, we advocate for the CoreShares S&P Global Dividend Aristocrats ETF (7.8%). The fund has risen 15.8% over the last five years. 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. It has a TER of 0.57%.
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, especially those in or nearing retirement."
CoreShares S&P Global Dividend Aristocrats ETF (GLODIV)
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and want to learn more about other ETFs?
Read: SA Market Outlook and Top Picks for 2023
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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.