It’s really all about numbers

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

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