The ETF Monthly Review: December 2019

Timothy Sithole
By Timothy Sithole December 18, 2019 12:00

The ETF Monthly Review: December 2019

The ETF Monthly Review

Welcome to this month’s ETF Review, a neat update of market news affecting ETFs, as well as a set of favourite funds chosen by the Intellidex team. We collaborate with Intellidex to bring you the latest insights on ETFs – probably the niftiest way to invest!


What happened in the markets in November?

The Intellidex portfolio of ETFs has returned 22.82% year-to-date, outperforming the portfolio of all JSE-listed ETFs’ return of 12.64%.

Some of the main market themes covered in this month’s ETF newsletter:

  • Global indices maintained a positive momentum on renewed optimism over US-China trade talks
  • Local equities surrendered some of their October gains.
  • Bonds and commodities disappoint.

Our favourite ETFs

  • Domestic equities: CoreShares Scientific Beta Multifactor Index ETF
  • Foreign equities: Satrix MSCI World ETF and Satrix MSCI Emerging Markets
  • Bonds and cash: NewFunds TRACI 3 Month (short term); Satrix ILBI ETF, 1nvest Global Bond ETF (long term)
  • Dividend/income funds: Stanlib SA Property ETF and Sygnia Itrix Global Property ETF
  • Commodities: Standard Bank Africa Rhodium ETF

What’s happened in the markets?

November saw a mixed performance by asset classes. Global stocks outperformed other assets buoyed by encouraging news coming from the ongoing US-China trade negotiations. The US’s S&P 500 rallied 3.6% while the MSCI Europe ex UK and the UK FTSE All-Share ended 2.5% and 2.2% up respectively. However, holders of JSE-listed foreign equity ETFs missed out on this rally due to a stronger rand. The rand survived a ratings downgrade from Moody’s on 1 November to end the month 3% stronger than the dollar which ate a significant chunk of dollar-denominated upside of foreign funds.

Local equities on the other hand surrendered some of their October gains. The JSE All-Share Index declined 0.55% in November weighed by declines from financials and industrials. With just one month left before the year ends, its almost certain that FY19 will be another painful year for local stockholders. Bonds and commodities assets were subdued. These events led to a 1.59% drop in the value of an equal-weighted portfolio of all JSE-listed ETFs. However, that portfolio is likely to end the year at a decent level as it is still a healthy 12.64% up year-to-date (YTD) thanks to foreign funds and commodities ETFs which were impressive during the past 11 months.

Intellidex’s favourite ETFs

Each month the investment gurus at Intellidex scan the market to come up with a list of their favourites.

Orin Tambo, CFA, explains:

We classify all ETFs into six broad categories:

  • domestic equities
  • international equities
  • bonds and cash
  • dividend or income-focused
  • multi-asset
  • commodities

Various empirical studies show that the bulk of equity returns stem from diversification among broad asset classes rather than from individual stock picking. As such, our grouping is done with a diversified portfolio in mind, ensuring appropriate exposure to different asset classes. First, we group the ETFs according to the three widely recognised asset classes – equities, bonds and cash. We further split equities into geographic groupings, then add a category for equity ETFs with an income theme.

Our picks should provide an investor with a relatively diversified portfolio, even if it was made up only of ETFs. However, asset allocation is not a one-size-fits-all concept. You need to make sure that weights of different asset classes in your portfolio meet your unique risk-and-return objectives. Multi-asset ETFs, which are already diversified among asset classes, are analysed as a separate category.

As a rule of thumb, we like ETFs that follow a watertight investment philosophy. They should also be tax smart, which means they should qualify to be in a tax-free savings account. To avoid overconcentration, a good ETF should cap its exposure to a single sector and/or a single counter. While competition among providers is intensifying and ETF costs are coming down, we look at this metric closely and prefer ETFs with low total expense ratios (TERs). An overview of our favourite funds for each category follows.

The December favourites:

Domestic equity: CoreShares Scientific Beta Multifactor Index ETF

With the local economy facing numerous challenges, robust risk management practices should be employed in portfolios. While we feel the Satrix SA Quality ETF implicitly achieves this through its multi-dimensional approach to the selection of its constituents, there is a new

Intellidex’s ETF portfolio shed 0.55% but is also set to end FY19 on a very strong note given that it is 22.82% up YTD.

Local ETFs
Locally, all asset classes were subdued which is not surprising considering a continued deterioration in the South African economy.

The 1nvest SA Property ETF, formerly Stanlib SA Property ETF, was the biggest winner on the local front with a return of 1.5% (YTD: 3.1%). The CoreShares PrefTrax came second with a share price gain of 1% (YTD: 7.9%). The NewFunds Govi (up 0.8%), NewFunds TRACI 3 month ETF (up 0.7%) and the Ashburton Midcap ETF (up 0.5%) complete the top five list for November.

The NewFunds Equity Momentum ETF which has been featuring consistently among best performers lately was the biggest loser in November with a 3.9% decline in its share price. But even with that set back, NewFunds Equity Momentum ETF is still 19.2% up YTD. Satrix Momentum, which similarly seek to invest in companies whose share prices are on the rise surrendered 3.1% putting it on second last position.

Other funds which were in the bottom five are: NewFunds Volatility Managed Moderate Equity ETF (down 2.8%), Satrix Rafi (down 2.8%) and Satrix Indi 25 ETF (down 2.5%). Among commodities the Standard Bank Africa Rhodium ETF, which rose by more than 8% (YTD: 144.8%), was the only one to report a positive return in November.

(rebranded) multifactor ETF which explicitly takes volatility into account as one of six factors it employs in fund construction.

The The CoreShares Scientific Beta Multifactor Index ETF fits our mould of a good investment philosophy as it is built with risk factors in mind. It was launched in May and has a great back-tested track record. We maintain our choice for local broad-based equity exposure with this new multifactor fund.  The fund did not perform too well this month losing 2.3%. There are extensions to this core local equity exposure that can be added in a tactical sense as a satellite fund. The NewFunds Equity Momentum fund (up 19.2% YTD) is worth considering.

Developed markets Foreign equities: Satrix MSCI World ETF

We maintain our exposure to the broad-based Satrix MSCI World Equity Feeder ETF, which is dominated by US equities. We think US stocks are more resilient than other developed market equities during turbulence, given the relatively stronger US economy. We are, however, cognisant of the elevated US valuations relative to other developed markets. The Satrix MSCI World Equity Feeder ETF was flat during November.  A good alternative, though, is the Ashburton Global 1200 Equity ETF (down 0.6%) but it has a higher total expense ratio. Other more focused international equity themes include property, dividend and technology funds. These are worth


International ETFs

Offshore, As noted in our introduction, international funds were let down by the rand which strengthened relative to the dollar. So while underlying indices performed robustly, the performance of local ETFs which tracks those indices was not as scintillating. The 1nvest S&P 500 Info Tech Index Feeder topped the table of foreign funds with a return of 2.2% followed by the Sygnia/Itrix 4th Industrial Revolution which closed the month 1.8% higher.

The Cloud Atlas Africa Real Estate and the CoreShares S&P Global Property ETF were the laggards in the segment after losing 8.5% and 5.5% respectively.

Macroeconomic review and outlook

Domestic news in November was dominated by developments around South African Airways (SAA), the interest rate decision of the South African Reserve Bank’s (SARB) Monetary Policy Committee (MPC), and S&P Global’s ratings update. The Bureau for Economic Research (BER) also released 2019Q3 readings of consumer and business confidence.

SAA and unions agreed on a salary increase of 5.9%, contingent on funds being available which allowed the ailing state carrier to resume full operations after a damaging weeklong strike. But that was a little too late as its board later resolved to place the company under business rescue. SARB’s MPC somewhat resisted pressure to cut rates and kept the policy rate unchanged at 6.5%. This was despite consumer price inflation slowing in October to a near nine-year low of 3.7%, below the consensus forecast of 3.9% and closer to the lower end of the SARB’s 3 to 6% target band.

The FNB/BER Consumer Confidence Index (CCI) slumped deep into negative territory. Overall, the South African economy remains in a perilous position and risks sinking further should President Cyril Ramaphosa fail to restructure the economy urgently. Due to a lack of policy cohesion within the ruling ANC, President Ramaphosa failed to ride the positive wave of sentiment following his ascendancy to the helm of both the ANC and the country at the end of 2017. Compared with the strong sentiment that characterised the beginning of 2018, the consumer confidence gauge has since fallen back to levels last seen in the Zuma era.

Government’s debt metrics have deteriorated faster than projected at the beginning of the year. While retaining Moody’s investment grade buys us a few months to sort out the mess, it’s difficult to see government taking drastic measures given that it has failed to act decisively since 2018. The risk of being junked after the 2020 budget in February has increased substantially.

We are now expecting the economy to grow a measly 0.4% in 2019, 1.1% in 2020 and 1.5% in 2021. We believe nothing short of action in reform implementation will cut it. In this context, we think SA-facing stocks, even at these low valuations which are somewhat justified by broad-based poor earnings, will remain unloved in the foreseeable future – as will government debt. However, the all share index will likely get support from the big mining counters and companies that generate the bulk of their earnings outside SA, as the rand is set to remain on a losing streak.

On the global front, the focus during November was on the latest trade data and business sentiment data from the US, China and Germany. Donald Trump’s drive to reduce trade imbalances between the world’s two largest economies is yielding some fruits. The US trade deficit narrowed from $55bn in August to $52bn in September as imports were down by 1.7% month on month (m-o-m), while exports receded by only 0.9%. In Europe, German trade data surprised on the upside, with the biggest rise in exports in two years. Exports rose by 1.5% m-o-m in September, resulting in a €19bn trade surplus.

Purchasing managers’ index (PMI) readings in the US and the European Union suggest tentative signs of improvement in business sentiment. In the US, the IHS Markit flash manufacturing PMI rose to a 7-month high of 52.5 in November from 51.3 in October. The latest Eurozone November flash PMI business surveys rebounded as all the major components of the Eurozone manufacturing PMI rose compared to the previous month’s level. Overall, international markets continue to offer better prospects than local markets.

Manufacturing appears to be picking up while business and consumer sentiment is solid. Most central banks have also shown willingness to continue propping up growth should their economies show signs of weakness. Nonetheless, equity valuations have now risen to levels close to their long-run averages so share price performance in FY20 may not be as strong as what we saw during FY19.

Risks to watch:

1) A synchronised slowdown in global growth with a downward revision of 2019 growth to 3% by the IMF, the lowest since the global financial crisis

2) Brexit uncertainty

3) Continued slow down of the Chinese economy. While it is expected to initially list on the Riyadh Stock Exchange before the end of the year, listings on other global bourses are expected to follow. This means the stock will likely feature in various ETFs, hopefully in the not too distant a future.

considering for tactical or other investor-specific reasons.

Developing markets foreign equities: Satrix MSCI Emerging Markets ETF 

For developing market exposure we choose the Satrix MSCI Emerging Markets ETF (-2.9%). It invests in a wide range of emerging economies including some of the fastest-growing markets such as China and India. The Cloud Atlas AMI Big50 (-4.9%), which focuses on African equities, can be used as a satellite fund to the core Satrix MSCI Emerging Markets fund. However, the Cloud Atlas AMI Big50 ETF has been extremely volatile since its listing on the JSE.

Diversified funds

If you find the process of diversifying your portfolio daunting, two ETFs can do it for you. They combine equities and bonds to produce a diversified portfolio for two investor archetypes with differing risk appetites: Mapps Protect ETF (-0.6%) is more conservative, usually suitable for older savers. Mapps Growth ETF (-1.6%) suits investors with a longer-term horizon.  Notably, both funds invest in SA-listed assets, thus lack an offshore flavour.

Dividend or income-theme funds

If you rely on your investment income for day-to-day expenses, you may want to allocate a portion of your portfolio to ETFs that have a high distribution ratio. Property funds tend to have the highest payout ratios.  Our pick here is the Satrix Property ETF  (-1.1%) which has a brilliant diversification approach. For foreign property funds we like the Sygnia Itrix Global Property ETF (-5.5%). It has an aggressively low total expense ratio (TER) of 0.24% that significantly undercuts its competitors, whose charges range from 0.34% to 0.52%.


Bond and cash funds

Fixed income securities should find their way into a well-diversified portfolio due to their risk-diversification attributes. If you are investing for a short period, usually less than a year, then the NewFunds TRACI (up 0.7%) is a natural choice because it is least sensitive to adverse interest rate movements. For a longer investment horizon, protecting your investment against inflation is paramount.

We maintain our choice of the Satrix ILBI ETF (-1.4%), which has the lowest expense ratio in this category. Furthermore, nominal bonds add a unique risk-return dimension that differs from inflation-linked bonds and improves overall portfolio performance.

The only option for local nominal bonds is the Newfunds GOVI ETF (0.8%). As with equities, investors also need to diversify their bond portfolios internationally. Our choice is 1nvest Global Bond ETF (-4.3%), which tracks investment-grade sovereign bonds mostly issued by the US, UK, Japan and selected European countries. The 1nvest Global Bond ETF has the lowest total expense ratio in this category.

Commodities: Standard Bank Africa Rhodium ETF

Adding a commodity ETF to your portfolio improves diversification because commodities march to the beat of their own drum – they are not in synch with broader markets. Traditionally, gold is the preferred addition to an investor’s portfolio because over longer periods it has shown to be the least correlated with other assets. However, our preference based on our medium-term outlook is between rhodium and palladium.

The new vehicle emission laws in Europe and China are driving demand for both commodities and this is expected to continue in the foreseeable future. We are slightly more inclined towards rhodium because it is scarcer, with lower extraction rates from PGM ore. The primary production of rhodium is somewhat inelastic and is expected to decline moderately over the medium term. The rhodium fund edged up by 8.5%, while palladium and gold funds ended in the red.

Important note: This ETF does not qualify for a tax-free saving account.

ETF strategy
Given this backdrop we think South African-facing stocks will remain under pressure, with the JSE generally marked by high volatility and low liquidity. A downside of ETFs is that they are index trackers, so they follow the market. If the economy is not doing well, markets fall which then translates into lower returns for ETFs. This underscores a need for offshore diversification.

We still find the US market attractive despite elevated market valuations for stocks. There is the possibility of a ‘phase one’ trade deal between China and the US which could spur economic growth to justify this optimism priced in stocks.




Timothy Sithole
By Timothy Sithole December 18, 2019 12:00

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