Di­verse port­fo­lio us­ing ETPs

Finweek English Edition - - INVESTMENT -

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.

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