More ETF choice for investors

The new exchange traded funds include a suite of smart-beta funds and funds that enable South African investors to track offshore indices. Martin Hesse reports

SEVERAL new exchange traded funds (ETFs) have recently been added, or will soon be added, to the range of these investments available to South Africans, among them so-called “smartbeta” funds.

ETFs are collective investments that, unlike unit trust funds, are traded on the

JSE, hence their name. An ETF tracks a market index by holding the assets represented in the index in the same proportions, thus delivering the performance of the index, known as “beta”.

Smart-beta funds track indices designed to mitigate risk and enhance performance, and some of these indices mimic the styles of active fund managers, who focus on shares that exhibit certain characteristics. For example, value managers seek out shares that offer good value – in other words, the shares are selling at a price lower than their inherent value.

NewFunds, a wholly owned subsidiary of Absa that specialises in ETFs, is launching two new ETFs next week that, along with a third, make up its SA Equity Premia Range.

From a universe of the 60 most actively traded shares on the

JSE, each ETF holds shares that exhibit a certain characteristic or “factor”, according to a custom- made index. The three ETFs are:

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holds the 20 shares that have exhibited the greatest price appreciation over the past 12 months (excluding the most recent month);

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holds the 20 shares that exhibit the lowest volatility and are the least likely to respond to extreme market movements; and

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holds the 30 stocks that represent the best value, with the lowest price-to-earnings and price-to-book ratios.

These three factors – momentum, volatility and value – have been shown over the long term to provide better performance than the market as a whole, at lower risk (see graph). Each factor goes through cycles of outperformance and underperformance, and the cycles of the different factors tend to be uncorrelated. Thus, says Absa, “adding them into portfolios that are well diversified should provide investors with returns in excess of the market over the long term.”

SATRIX NASDAQ ETF

Following the launch of three global ETFs last year, Satrix is adding the Satrix Nasdaq

100 ETF to its stable. The fund tracks the Nasdaq-100 index, which comprises the 100 largest, non-financial companies on the Nasdaq stock exchange.

The Nasdaq-100 index is a market-capitalisation-weighted index that is technology-heavy but also includes industrial, retail, telecommunication, biotechnology, healthcare, transportation, media and service companies. The likes of Apple, Alphabet, Microsoft, Facebook, Amazon, Netflix and PayPal form part of the index.

“The Nasdaq-100 is the benchmark for the new industrials – the global companies changing the way we work, socialise, transact and move every single day,” says Dave Gedeon, the vice-president and head of global index research and product development for Nasdaq Global Indexes. “From technology to medicine to industry, there is no corner of innovation that the Nasdaq-100 does not reach, and now investors in South Africa are able to access these innovative names in an ETF wrapper for the first time.”

The Satrix Nasdaq 100 ETF is a rand-denominated offshore fund. You don’t need tax clearance from the South African Revenue Service to invest in this ETF, as your investment is made in rands and will be paid out in rands on disinvestment in South Africa.

The initial public offering for the Satrix Nasdaq 100 ETF opened on March 14 and ends on March 28. The anticipated JSE listing date is April 10.

ASHBURTON BOND ETF

Meanwhile, Ashburton Investments, the asset management arm of the FirstRand group, listed the Ashburton World Government Bond ETF last week.

The new ETF tracks the Citi World Government Bond Index, which invests in fixed-rate, investment-grade sovereign bonds from more than 20 developed and emerging- market countries.

Samantha Schoeman, the head of index tracking at Ashburton, says: “We have had strong interest in the new ETF since the initial offering opened, and we expect it to be popular with South African investors looking to diversify their portfolio holdings. It will provide retail and institutional investors with easy exposure to the world’s bond markets in one low-cost, taxefficient ETF.”

The biggest holdings in the ETF are government bonds from the United States (33.6%), Japan (19.7%) and France (8.4%).

Schoeman says bonds are an essential part of balanced portfolios and, as with share investing, it is prudent for

South African investors to hold international bonds alongside local ones to benefit from diversification.

The listing will be in rands, which means that local investors will not have to use their offshore allowances to invest.

martin.hesse@inl.co.za