It’s re­ally all about num­bers

But mem­ber­ship of the top lists changes along with sen­ti­ment and cir­cum­stances

Financial Mail - Investors Monthly - - Analysis: Exchange-traded Funds -

ick a num­ber, any num­ber, and you’re likely to find an eq­uity mar­ket in­dex to match. The US goes big; its most­watched in­dex, the S&P, in­cludes the 500 largest pub­licly traded shares on the New York Stock Ex­change. Ja­panese in­vestors fo­cus on less than half that with the Nikkei 225, while the Brits are even more mod­est with the FTSE 100 in­dex of the 100 largest shares listed on the Lon­don Stock Ex­change.

Per­haps it’s an in­di­ca­tion of the rel­a­tive size of our mar­ket, but 40 ap­pears to be the mag­i­cal num­ber on the JSE. Well, un­til now any­way.

There are many ex­change traded prod­ucts built around the FTSE-JSE Top 40 in­dex — some di­rectly, such as the Sa­trix 40 ETF, and some us­ing smart beta, such as the Bet­taBeta Equally Weighted Top 40.

The Top 40 in­dex in­cludes the 40 largest com­pa­nies on the JSE in terms of mar­ket cap­i­tal­i­sa­tion — 42 if you in­clude the Lon­don-listed shares of Mondi and Investec. Any­thing out­side that in­dex is con­sid­ered a mid cap. The FTSE-JSE Mid Cap in­dex con­tains the next 60 largest com­pa­nies on the JSE and if you’d like ex­po­sure to these through an ETF, RMB of­fers one.

But go­ing back to the 40 largest com­pa­nies: they nat­u­rally change as cir­cum­stances and sen­ti­ment push their share prices up and down, bring­ing new en­trants to the Top 40, while other stocks fall out.

The most re­cent changes saw Im­pala Plat­inum, Life Healthcare and Im­pe­rial Hold­ings giv­ing way to Capitec, Brait and MMI. The likes of SABMiller, Richemont, FirstRand, BHP Bil­li­ton and Naspers are likely to en­dure volatile mar­kets and fickle in­vestors and re­main on the in­dex for the long term. How­ever, con­sider that a num­ber of con­struc­tion com­pa­nies used to fea­ture on that list — and are now nowhere near large enough for in­clu­sion. For the most part, the usual sus­pects are there and are likely to stay.

Move a lit­tle lower and there are other in­ter­est­ing com­pa­nies that you might want ex­po­sure to through an ETF, with­out go­ing the whole she­bang and buy­ing a mid-cap ETF. CoreShares is now of­fer­ing an ETF that cov­ers the 50 largest stocks on the JSE — so, the Top 40 and then the 10 largest mid-cap shares. It’s mod­elled on the S&P SA 50 in­dex, but again in­cludes 52 stocks to al­low for the dual-listed struc­tures of Investec and Mondi. Stocks are in­cluded on free-float mar­ket cap, un­like the Top 40 which ranks on mar­ket cap­i­tal­i­sa­tion and only then ap­plies a free-float fac­tor. Un­like the Top 40, it also caps hold­ings at 10%.

So, while hold­ers of Top 40 funds bid farewell to Im­plats, Life Healthcare and Im­pe­rial as they are rel­e­gated to the mid-cap in­dex, in­vestors in the CoreShares Top 50 get to hold onto them, as well as a few oth­ers in­clud­ing the likes of Telkom, The Fos­chini Group and Nam­pak.

S&P says that mar­ket growth and im­proved liq­uid­ity on the JSE war­rant an en­larged bench­mark in­dex.

For in­vestors look­ing for broad eq­uity ex­po­sure, the Top 50 rep­re­sents about 90% of the mar­ket cap­i­tal­i­sa­tion of the mar­ket. On a one-year ba­sis, it has com­fort­ably beaten the per­for­mance of the Top 40, although go­ing fur­ther back its out­per­for­mance narrows.

CoreShares is not alone in tar­get­ing a big­ger uni­verse of large-cap stocks; Absa has launched the GIVI (Global In­trin­sic Value In­dex) SA Top 50 ETF. This repli­cates the S&P GIVI SA Top 50 In­dex, which com­bines low volatil­ity with in­trin­sic value. Stocks in­cluded must have a mar­ket cap of at least R10bn, with a min­i­mum av­er­age daily traded value of R15m. S&P Dow Jones In­dices claims com­bin­ing value and low volatil­ity into one in­dex (ETF) is a first for SA. Absa’s se­ries of GIVI ETFs are also the first to be listed glob­ally.

Stay­ing with num­bers, from this month I’ve re­placed War­ren Dick on ETF Watch. He’s done a great job of keep­ing you all in­formed of the trends and de­vel­op­ments in the ex­change traded prod­uct mar­ket since In­vestors Monthly was launched back in 2010. He wrote more than 50 col­umns in that time. I hope I can match his en­thu­si­asm and in­sight and pro­duce even more than that in the years ahead.

For the most part, the usual sus­pects are there and are likely to stay

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