Diverse portfolio using ETPs
Areader emailed me asking about constr ucting a diverse portfolio using just exchanged-traded products ( ETPs), whether it was possible and how one would go about doing so. We have touched on this before but a more detailed response is certainly worthwhile as one can constr uct a great diverse portfolio using ETPs.
The f irst port of call is an ETP such as the Satrix40* (STX40) and BettaBeta Equal Weighted 40* (BBET40) – both give immediate diversif ication within the equity world. They both include the 40 largest stocks on the JSE in their ETP, which gives you a range of industries and different stocks within each industry. So, with one purchase of one of these ETPs, you are already diversif ied. The difference between the two is that the Satrix is market-cap weighted while the BettaBeta is equal weighted.
But in the above example you’re only diversified within stocks, a good thing, but wider diversification is recommended for a truly solid portfolio. Typically, a diverse portfolio would include stocks, property, debt ( bonds), international stocks, commodities and some cash. The logic behind having a range of different asset classes is that they will each have their own great periods and rough periods, and by spreading a portfolio across the different asset classes you reduce specif ic market risk from the overall portfolio.
So the shares part is easy, as mentioned above. International shares are also easy (remember, of course, that most Top40 shares have international revenue – a majority of revenue comes from international sources) with the db X-trackers that track international markets. Here my preferred would be either the EU or US markets (or a combination of both). They give you not only rand hedge but also pure exposure to the respective markets. The codes are DBXUS and DBXEU. There are also other international ETPs tracking China, Africa and the BRICS nations – but seeing as South Africa is an emerging market, I would stick to the developed markets. One can of course also get pure currency hedge using the Absa currency ETPs that track a variety of currencies such as pound sterling, US dollar and the euro, but I prefer the currency hedge and equity mix.
Debt is an interesting and important part of a well-diversified portfolio, almost in a sense an insurance policy. My preferred is the preference share ETP from Grindrod ( PREFEX). This is a high-yielding basket of preference shares that won’t give capital appreciation but will give strong income and will hold up in a falling market (this is the theory, in practice it may not hold up perfectly, but will likely not decline as much as a falling market). There are also bond ETPs f rom Investec (ZGOVI) and RMB (RMBINF) with the latter tracking the inf lation-linked Government bonds.
Property is an important asset class and easy in the ETP space with the PTXTEN* my preferred as it tracks the 10 largest property stocks in an equal weighted basket, while STPROP and PTXSPY* t rack t he l isted property index of 20 stocks.
Commodities would traditionally be gold and there is GLD, which tracks the rand gold price but my preferred commodity would be platinum or oil, and here we have NGPLT from Absa tracking the rand platinum price while OILRMB from RMB tracks the rand WTI oil price.
So, with just f ive ETPs you have your well diversified portfolio: BBET40, PTXTEN, DBXUS, PREFEX and NGPLT. For a little more diversification one could add DBXEU and OILRMB, which amounts to only seven ETPs giving a full mature and diverse portfolio. If you really wanted to get cleverer, you could put some of the BBET40 money into other different equity ETPs such as STXDIV*or RMBMID* and also split some of the PREFEX money into RMBINF.
The last important part is the weighting between the different assets and this is more complicated as it depends on risk profile, age and the like. Broadly, a midrisk portfolio would put 50% into shares, 15% into property, 15% international and 10% each into commodities and debt.
Simon Brown is a Finweek contributor and heads justonelap.com, a free resource of financial information and investment education.
The writer owns STX40, BBET40, PTXSPY, PTXTEN, STXDIV and RMBMID.