Market Uncertainty ETF Picks

Intellidex ETF Picks

Uncertainty is here! But luckily the gurus at Intellidex are ready for the current market downturn and share 3 Exchange Traded Funds (ETFs) with us to combat market uncertainty, check it out!

Here are the Intellidex top picks for the long haul:

Domestic Equity

Satrix Capped All Share ETF (STXCAP)

After a strong showing in Q1 2022, the All-Share Index declined in April and was down 2.5% year-to-date. Index returns were dragged down by the mid-caps segment, resources, and industrials that all posted negative returns. In addition to the negative developments discussed above, we believe that profit from holdings in mining counters has already been made and that this may explain the pull-back in the mining sector.

Also, while banks should benefit from the South African Reserve Bank’s rate-hiking cycle, the 7.8% slide in the financial sector index (dominated by commercial banks) during April indicates that investors are more nervous about local economic prospects than the increase in activity following reduced lockdown restrictions (potential increase in transactional revenue) and increasing interest rates.

This informs our pick for broad exposure to SA equities, especially given the uncertain economic outlook for SA, which will ultimately affect SA company earnings. The Satrix Capped All Share ETF (-4.8% in April) exposes investors to SA equities but caps the maximum exposure of each share at 10%. It also has a reasonable total expense ratio (TER) of 0.25%. Another reason for the pick is the potential for a recovery in the Naspers/ Prosus pair of share prices.

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Foreign Equity:

Satrix MSCI World Feeder ETF (STXWDM)

Given that global equities have become relatively cheaper, Anchor favors exposure in high-growth sectors over the long term. Nasdaq similarly reports that the S&P500 forward price/ earnings ratio is 18.1x, which is slightly lower than the five-year average of 18.6x. Given the uncertain outlook globally, which includes lower economic growth and high inflation, we accordingly believe that broad exposure with a slight tilt toward growth companies may be useful.

Over the last 12-18 months, market views of a strong rotation from growth into value became quite prominent as there were high expectations of a stronger economic recovery, underpinned by a rebound in the services sector and a consumer recovery.

However, consumers globally face higher living costs from rising input costs that have been passed on by companies, which may place a drag on future consumer spending, especially of a discretionary nature.

Bonds and cash

Satrix SA Bond ETF (STXGOV)

We retain our bond pick from last month being the Satrix SA Bond ETF (-1.5%), which is the cheapest ETF in its class (TER: 0.25%). In addition to the diversification benefits of adding fixed income to a portfolio (discussed last month), we believe that SA’s nominal bonds may be relatively attractive.

According to SA’s derivative markets, where estimates of future interest rates are determined, the market is pricing in 180 basis points of hikes in 2022 and another 70 basis points in 2023. This would bring the repo rate to 6.75% by the end of next year.

However, Intellidex economists (and other investors) expect a more moderate interest rate path of 75 basis points for the rest of this year and another 75 basis points in 2023, bringing the repo rate to 5.75% by year-end (2023). If indeed a milder interest rate path is achieved due to SA’s subdued inflation relative to other economies globally, then demand SA bonds may increase due to attractive pricing and yields. Against this backdrop, Anchor forecasts a decent one-year total return on SA nominal government bonds of 10%.

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Informed decisions and Outlook

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 the 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.

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Background: Exchange-traded funds (ETFs)