Weigh­ing in on weight­ings

A few large com­pa­nies have sig­nif­i­cant pull on the per­for­mance of the JSE top 40 in­dex

Financial Mail - Investors Monthly - - Analysis: Technical -

The weight­ings of var­i­ous shares on the JSE in­dices are im­por­tant in terms of how an in­dex per­forms. This has been abun­dantly clear on the top 40 in­dex in the first few months of the year. The top 40 in­dex is a free float* mar­ket cap­i­tal­i­sa­tion weighted in­dex of large-cap stocks on the JSE.

The weight­ings of the top 40 are heav­ily skewed to a few re­ally large com­pa­nies, and these com­pa­nies have a sig­nif­i­cant pull on the per­for­mance of the in­dex. Since the start of the year, the two largest com­pa­nies by weight on the top 40 have per­formed ex­cep­tion­ally, and this has helped to lift the over­all in­dex.

A ta­ble il­lus­trat­ing the weight­ings of the 10 largest stocks on the top 40 in­dex is shown, along with the year-to­date per­for­mance of those stocks. No­tice how Naspers and Richemont have per­formed ex­tremely well, with gains of 32% and 25% for the year to date. These are also the stocks with the heav­i­est weight­ings on the in­dex. To­gether they make up about one-third of the weight­ing of the top 40 in­dex.

The only other stock that has per­formed rel­a­tively well is Bri­tish Amer­i­can To­bacco, with a gain of 18%.

The ta­ble shows a very lack­lus­tre per­for­mance for the re­main­ing stocks on the list.

To un­der­stand what a dif­fer­ence the weight­ing of Naspers and Richemont has made to the top 40 in­dex, it is in­struc­tive to com­pare the Sa­trix 40 ex­change traded fund (ETF) and the Core­Shares equally weighted top 40 ETF.

The Sa­trix 40 is an ETF that mim­ics the per­for­mance of the JSE top 40 in­dex. It has the ex­act same weight­ings and per­forms ex­actly in line with the top 40. The Core­Shares equally weighted top 40 ETF weights the shares equally. So the largest shares by mar­ket cap­i­tal­i­sa­tion at­tract the same in­dex weight­ing as the small­est ones.

Note what a dif­fer­ence this has made to the two ETFs’ per­for­mance since the start of 2017. The Sa­trix 40 is up al­most 8% for the year to date, thanks to the hefty weight­ings and stel­lar per­for­mance of Naspers and Richemont. On the other hand, the Core­Shares equally weighted top 40 ETF has de­liv­ered a per­for­mance of about 2.5%, track­ing side­ways for the year to date. Put an­other way, the skewed weight­ing of Naspers and Richemont added about 5.5% in per­for­mance to the top 40 in­dex.

That’s not to say this will con­tinue to be the case. If we were to en­ter a pe­riod in which the largest stocks in the in­dex

Gains wit­nessed on the JSE this year have not been broad based

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