ETF weekly review – a closer look at the Satrix Quality South Africa ETF

Mayo Twala
By Mayo Twala September 21, 2017 12:55

ETF weekly review – a closer look at the Satrix Quality South Africa ETF

Intellidex | 21 September 2017

Every week Intellidex reviews an ETF fund for EasyEquities. See previous reviews we’ve done here.

After listing five ETFs earlier this year, Satrix is planning to list another – a smart beta ETF. Traditionally ETFs track their benchmark indices based on market capitalisation, with bigger companies getting higher weightings – or all getting equal weightings in some funds. Over the past few years though smart-beta ETFs having been gathering steam. Instead of using simple market weights, these funds attempt to capture performance by applying a specific investment strategy so as to capture companies with low volatility, for example, or ones that pay sustainable and growing dividends. Others invest in a set of momentum, quality or value stocks.

Satrix Quality SA aims to invest in quality stocks on the JSE.  The concept for quality investing originated in the bond markets where both the quality and price of potential investments are determined by ratings. The same concept is now being applied to equity markets. Benjamin Graham, the founding father of value investing, was the first to recognise the quality problem among equities back in the 1930s. In his book, The Intelligent Investor, he observed that the greatest losses result not from buying quality at an excessively high price, but from buying low quality at a price that seems good value. While many investors apply quality filters when choosing potential investments, there is still no commonly agreed methodology for calculating the quality score.  Generally, the quality assessment is based on factors such as management credibility and/or some ratios.  Satrix Quality SA ETF calculates the score based on return on equity, the accruals ratio and the financial leverage ratio.

The outperformance of high-quality stocks over low-quality stocks is well-documented in financial research. Empirical evidence shows that portfolios sorted on factors such as profitability and earnings quality generated high risk-adjusted returns relative to the market portfolio or a multi-factor model, but the size of the premium varies depending on the metrics used to calculate the quality score.

Suitability:  This is an aggressively managed fund so it will suit long-term investors who can stomach variability in the short term.

What it does: Satrix Quality SA ETF tracks the S&P Quality South Africa Index which tracks high-quality stocks in the South African market by quality score. This quality score is based on a company’s return on equity and its accruals and financial leverage ratios. The fund takes the top 20% of the S&P South Africa composite universe with the highest aggregate quality scores.  Weightings are based on the counter’s market capitalisation in the S&P South Africa composite universe, subject to security and sector constraints.

Satrix Quality SA ETFTop holdings: The fund is highly concentrated in its top 10 stocks, with 83% of its funds in just 10 counters. Financials account for 40% of the fund followed by consumer staples with 23.6%.

Risk: The fund is designed to track an equity benchmark so there may be some capital volatility in the short term, although higher returns may be expected from five years or beyond. The performance of the fund may be affected by changes in economic and market conditions, political developments, changes in government policies or changes in legal, exchange control, regulatory and tax requirements.

How to participate: The initial public offering is now closed but investors will be able to invest when the fund lists on the JSE on 26 September.

Advantage:  The fund does not discriminate against counters based on market capitalisation. Thus, it invests even in small caps, which most funds on the bourse wouldn’t normally consider.

Fees:  Satrix Quality SA ETF is expected to have a total expense ratio of 0.4%. With Satrix having recently reduced the TER for its Satrix Top 40 fund to 0.1%, this ETF seems expensive.

Performance: The historical performance of the underlying index is largely in line with other indices.  The graph below shows the performance of the underlying index since inception in 2014.

Satrix Quality SA ETF 2

Alternatives: There is no direct peer fund, but investors may consider top 40 ETFs as an alternative.

BACKGROUND: Exchange-traded funds (ETFs)

Exchange Traded Funds (ETFs) are passively managed investment funds that track the performance of a basket of pre-determined assets (in this case, US companies). They are traded the same way as shares and the main difference is that whereas one share gives exposure to one company, an ETF gives exposure to more than one company in a single transaction. ETFs can be traded through your broker the same way as shares, say, on the EasyEquities platform. In addition, it qualifies for the tax-free savings account, where both capital and income gains accumulate tax free.

Benefits of ETFs

  • Gain instant exposure to various underlying shares in one transaction
  • They diversify risk because a single ETF holds various shares
  • They are cost-effective
  • They are liquid – it is usually easy to find a buyer or seller and they trade just like shares
  • High transparency through daily published index constituents



This research report was issued by Intellidex (Pty) Ltd. Intellidex aims to deliver impartial and objective assessments of securities, companies or other subjects. This document is issued for information purposes only and is not an offer to purchase or sell investments or related financial instruments. Individuals should undertake their own analysis and/or seek professional advice based on their specific needs before purchasing or selling investments. The information contained in this report is based on sources that Intellidex believes to be reliable, but Intellidex makes no representations or warranties regarding the completeness, accuracy or reliability of any information, facts, estimates, forecasts or opinions contained in this document. The information, opinions, estimates, assumptions, target prices and forecasts could change at any time without prior notice. Intellidex is under no obligation to inform any recipient of this document of any such changes. Intellidex, its directors, officers, staff, agents or associates shall have no liability for any loss or damage of any nature arising from the use of this document.


The opinions or recommendations contained in this report represent the true views of the analyst(s) responsible for preparing the report. The analyst’s remuneration is not affected by the opinions or recommendations contained in this report, although his/her remuneration may be affected by the overall quality of their research, feedback from clients and the financial performance of Intellidex (Pty) Ltd. Intellidex staff may hold positions in financial instruments or derivatives thereof which are discussed in this document. Trades by staff are subject to Intellidex’s code of conduct which can be obtained by emailing mail@intellidex.coza. Intellidex may also have, or be seeking to have, a consulting or other professional relationship with the companies mentioned in this report.

Mayo Twala
By Mayo Twala September 21, 2017 12:55

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