Stanlib Swix 40 ETF

Nonhlanhla Kunene
By Nonhlanhla Kunene October 5, 2016 16:38

Suitability: The Stanlib Swix 40 ETF is ideal for investors with a long-term investment horizon which gives the portfolio enough time to weather short-term volatility that comes with equity investments. Because the ETF tracks the largest companies on the JSE, it is an ideal vehicle for exposure to quality blue-chip companies and is less volatile than mid- and small-cap stocks. Furthermore, the 40 stocks are across industries and thus bring some diversification and can be considered as a core investment for the long term. The fund has slightly lower costs than close alternatives and a lower tracking error.

What it does: The Stanlib Swix 40 ETF aims to mimic the performance of the FTSE/JSE Swix top 40 index in terms of price performance as well as income from the component securities of the index. However, this index differs from the top 40 index in that it only considers the free-float market capitalisation of companies that are held on the JSE register. By considering the JSE register only, it means that dual-listed stocks are down-weighted because a significant portion of their shares are held offshore.

A free-float adjusted market capitalisation format is based on the market capitalisation of each company excluding locked-in shares such as those held by holding companies, founders and governments. The ETF is therefore more representative of the universe of shares actually available to South African investors.

The fund is rebalanced quarterly in line with the FTSE/JSE index rebalancing methodology and from time to time as a result of corporate actions.

Advantages

  • In the long run it will theoretically outperform other major asset classes such as bonds and cash, albeit at elevated volatility.
  • Easy access to the largest companies on the JSE through one investment at a lower cost than acquiring them individually.
  •  Many of the biggest companies on the JSE earn a significant portion of their earnings outside SA. The rand’s severe depreciation over the past few years, accelerating over the past few months, means foreign earnings are increased substantially when exchanged into rands.
  • Lower volatility than both small- and mid-cap stocks.

Disadvantages

  • Market capitalisation weightings skew the portfolio towards the largest stocks, which diminishes diversification benefits. The Swix index partly addresses this skewness by rebalancing according to South African held shares. Companies like Anglo American and BHP Billiton therefore have a relatively low weight compared to the general Top 40 index.
  • ETFs are passive instruments and do not make active bets, which is a concern in periods of poor economic activity, given that broadly, equities returns are linked to economic activity. However, the significant non-rand earnings component reduces correlation to the SA economy and empirical evidence shows that active portfolio management, on average, does not outperform passive investing.

Risk: This is a 100% investment in equities, which is a riskier asset class than bonds or cash. It is volatile, but the returns over time should compensate for volatility. Constituent companies operate in several jurisdictions, mostly emerging economies, which somewhat elevates political and currency risk. However, the sectoral and geographical diversity of the constituents diminishes the risks to a degree.

Fees: The total expense ratio is 0.34%. Additional costs associated with trading the ETF include bid-ask spreads and brokerage fees.

Historical performance:

stanlib-swix-40-etf

Nonhlanhla Kunene
By Nonhlanhla Kunene October 5, 2016 16:38
Researching Capital Markets & Financial Services

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