An ETF for every taste

The many funds that track indices have both attractions and limitations that investors need to be aware of, writes Laura du Preez

Newbies and more experienced investors are increasingly realising the value of using exchangetraded funds (ETFs).

You don’t have the anxiety of which shares to choose, as ETFs allow you to “buy the market” at affordable investment amounts.

This is possible through an increasing range of ETFs — and unlisted index-tracking unit trusts — that track indices of shares across local or global markets, known in the industry as “broad-based” indices.

If you are an ETF investor, you will also see a growing number of funds focused more narrowly on sectors, countries or investment themes. Longterm investors can use them to add to their broad exposure a smaller sector or theme tilt, but doing so sensibly means understanding what you hold.

For your primary focus on getting the broad exposure to the markets, the following are your options.

LOCAL MARKET ETFS

There are four ETFs that track this index of the 40 largest shares on the JSE, and the most popular one is the country’s oldest ETF: the Satrix 40.

Simple to understand and with a solid average annual return of 13.8% a year for more than 20 years since its launch, it was voted The People’s

Choice in the recent SA Listed Tracker Awards.

Investors tracking the top 40 index have done particularly well over the past seven years, as the large dual-listed and resources shares that dominate the index have outperformed many shares whose fortunes are tied more closely to SA’s ailing local economy.

But a longer focus shows that the large shares do not always outperform more domestically focused stocks on the JSE, and despite continuing pessimism about the local economy, you may want to consider casting your investment net wider.

Victoria Reuvers, MD of Morningstar’s discretionary investment manager, says while the top 40 may have been a good investment, it is not a well-diversified one. As at the end of March, five shares made up more than 50% of the index and the top 10 shares made up 69%, according to investment management firm FTSE Russell.

There are three ETFs that track the top 40 shareholder weighted index, which down weights the large dual-listed shares by excluding what is held on other exchanges. The net effect of that is an increase in the weighting of homegrown heavyweight Naspers.

According to FTSE Russell the Swix top 40 had 24% in

Naspers and also 69% in the top 10 holdings at the end of March.

Nerina Visser, strategist and adviser at ETF investment platform ETFSA, says you need to ask yourself if you are comfortable with a single share making up between 20% and 24% of your investment.

Remember, too, if you are invested with any active managers you may have a high exposure to Naspers, because many of their funds are benchmarked to the Swix or the capped Swix, which limits the weighting of any large shares at 10% of the index.

Over longer periods of 10 and 15 years, the returns earned by the FTSE/JSE Alsi and the FTSE/JSE top 40 and their Swix alternatives are relatively small, but the differences are more marked over periods of seven years or less.

Visser says over the long term it won’t make that much difference which of the indices you choose — the main thing is to pick one that gives you broad exposure to the market.

It is much better to get investing than to go into analysis paralysis, she says.

The S&P SA top 50 index gives you exposure to the top 40 plus 10 mid-cap shares. In addition, the maximum weighting of any of the shares in the top 50 is capped at 10%.

Visser says this is the most diversified broad-based index tracked by an ETF, and it is both her and Reuvers’s choice of broad-based local indices.

Risk-adjusted returns show the top 50 is less volatile, but the top 40 may give you better returns at times on straight performance, Visser says.

Nedgroup Investment head of core investments Jannie Leach says diversification is the key way to manage risks when you invest passively in index trackers, so it is important to get exposure to as big a universe as you can.

Locally, you should get exposure to at least the top 60100 shares, he says.

Leach says capped indices are now preferred because they reduce the risk of exposure to Naspers, but there are no ETFs tracking the capped indices. The risk can, however, be managed with more offshore exposure, he says.

TILTS ON YOUR LOCAL BROAD EXPOSURE

If you invest in a top 40 or top

Picture: 123RF — TASHATUVANGO