The ETF Monthly Review: June 2019
By Colin Anthony
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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!
IN THIS ISSUE:
What happened in the markets in May?
- Equities tumble on resumption of trade war between the US and China
- Ramaphosa’s new cabinet receives a thumbs up from investors
- Public spat among the ANC figures jitters markets
Our favourite ETFs
- Domestic equities: Satrix SA Quality ETF
- Foreign equities: Satrix MSCI World ETF and Satrix MSCI Emerging Markets
- Bonds and cash: NewFunds TRACI 3 Month (short term); Satrix ILBI ETF, Stanlib Global Bond ETF and Ashburton World Government Bond ETF (long term)
- Dividend/income funds: Stanlib SA Property ETF and Sygnia Itrix Global Property ETF
- NEW in Commodities: Standard Bank Africa Rhodium ETF
What’s happened in the markets?
May was a dismal month for risky assets thanks to renewed hostilities between the US and China. Share prices of non-commodity JSE-listed ETFs fell 3.02% on average while Intellidex’s selection of ETFs lost 1.47%. Local funds fell 3.78% and international funds lost 2.18%.
Local markets: May performance
The conclusion of SA’s elections, which saw the ANC remaining in power, and the announcement of a new cabinet which was well received (albeit with a few disappointments), failed to inspire the markets during May. All major asset classes suffered negative returns.
The JSE all share index registered its first negative calendar month return since the beginning of the year. It lost 4.92% and is now up 5.53% year-to-date (YTD). The underperformance was broad-based across all three major sectors. Resources fell 5.16% (7.46% up YTD); industrials were down 5.96% (6.97% up YTD) and financials weakened by 2.52% (0.95% up YTD).
The JSE all bond index traded sideways during May, closing the month with a marginal gain of 0.6%, while the government inflation-linked bond index (ILBI) and the FTSE/JSE SA listed property index struggled, losing 0.7% and 0.9% respectively. The rand weakened by 1.9% against the greenback, 1.6% against the euro and 1.2% against the pound. The majority of local ETFs reflected the poor performance of major indices. Only seven out of 51 funds on the bourse had positive returns.
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 (we initiate coverage this month)
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 simple but 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 ETF costs are still coming down as competition among local providers intensifies, 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 March favourites:
Domestic equity: Satrix SA Quality ETF
We maintain our choice of the Satrix SA Quality ETF. While we are encouraged by the quality of the cabinet which was assembled by Cyril Ramaphosa, SA’s economic growth prospects remain bleak. Recent political events show politicking within the ANC is still very much alive and dampens the prospects for reforms. Given this outlook and recent GDP data which showed the economy shrank 3.2% during Q1, we think it’s wise to stick with quality stocks. The Satrix SA Quality ETF selects constituent
Absa New Gold topped the table with a rise of 3.47%. It was followed by its peer, Standard Bank Africa Gold, which grew 3.38%. Standard Bank Africa Platinum was the worst performer, sliding 8.97%. Outside of the single-commodity funds, the NewFunds S&P GIVI South Africa Resources ETF was the laggard with a loss of 8.86%, while the NewFunds Equity Momentum fund was the best performer with a return of 1.19%.
The key event during May was the elections, followed by President Cryil Ramaphosa’s cabinet announcement which was received well by the market despite concerns that it remained bloated. Ramaphosa reduced the number of ministries to 28 from 36, but the number of members in cabinet remained elevated at 64 with more deputy ministers.
In terms of economic data, Statistics South Africa released production numbers for March for manufacturing and mining. Manufacturing production surprised on the upside, printing at +1.2% year on year (y-o-y) or +0.8% month on month (m-o-m). Mining output contracted by a further 1.1% y-o-y in March after falling a revised 8.1% in February. The official unemployment rate rose to 27.6% in 2019Q1 from 27.1% in 2018Q4.
International markets: March performance
Renewed hostilities between the US and China, mixed data from the eurozone, and the resignation of Theresa May in the UK, spooked investors into leaving equities for bonds.
companies using a set of quality metrics, including return on equity, liquidity and leverage. Such stocks tend to be more resilient to economic shocks. The Satrix fund is also a good bet in a volatile local equity market. It shed 5.82% during May. Investors should also consider the smart beta funds recently launched by Absa. These ETFs manage volatility and drawdowns and aim to address the issue of high short-term volatility displayed by general equity ETFs that are weighted by market capitalisation. However, they accumulate higher trading costs as they are regularly rebalanced, thus they have relatively high total expense ratios.
Foreign equities developed markets: Satrix MSCI World ETF
In this category we like the Satrix MSCI World Equity Feeder ETF (down 3.85% in May) and the Ashburton Global 1200 Equity ETF (down 4.64%). They diversify their exposure across the US, Europe, Japan, Canada and Australia. With more than half of the funds invested in US stocks, investors will still have substantial exposure to the US. Satrix MSCI World beats Ashburton Global 1200 Equity ETF on costs. Other more focused international equity themes include property and technology funds. These are worth considering for tactical or other investor-specific reasons.
Foreign equities, developing markets: Satrix MSCI Emerging Markets ETF
The US hiked the tariff rate on $200bn worth of Chinese imports from 10% to 25% and threatened that it may impose a 25% tariff on the remaining $300bn worth of Chinese imports. China responded by increasing the tariff range from 5-10% to 5-25% on $60bn worth of imports from the US. Data for May released by the eurozone were lukewarm. The flash manufacturing purchasing managers index softened to 47.7, indicating contraction. There were some positive signs though.
The new export orders component, while still below the halfway mark, ticked up and eurozone consumer confidence climbed to its highest-level YTD. The initial estimate for 2019Q1 GDP also outperformed expectations with annualised growth of 1.6% over the last quarter. In the UK, uncertainty was heightened by May’s resignation.
Equities took most of the heat from the negative developments in May. In the US, the S&P 500 lost 6.4%. Hong Kong’s Hang Seng index declined 1.10% month on month (+1.84% year to date) and the Shanghai composite index advanced by 0.43%. European markets were not spared as the MSCI Europe ex UK fell 4.8% while the MSCI UK ended 2.8% weaker.
Bonds, on the other hand, performed decently. The JP Morgan GBI Global Index rose 1.8%. On the JSE ETF market, the Stanlib S&P 500 Info Tech Index Feeder came out tops for the second consecutive month with a return of 4.86%. All the bond funds also ended positive. Cloud Atlas Africa Real Estate was the worst performer. Looking forward we expect political developments within the ANC, the Reserve Bank’s decision on interest rates, and the ongoing trade war between China and the US to influence asset performance.
Recent public spats between some top ANC officials – Tito Mboweni, Ace Magashule and Enoch Godongwana among others – clearly reveal strong ideological differences within the governing party, something we see as negative to the prospects of the much-needed economic reforms in SA.
The choice in this segment is limited to two funds: Satrix MSCI Emerging Markets (-5.43%) and the Cloud Atlas AMI Big50 (+2.64%). Unlike the Cloud Atlas fund which invests in African stocks only, the Satrix fund invests in a wider range of emerging economies, including some of the fastest-growing markets such as China and India. In addition, the fund is the cheapest within its category with a TER of 0.4%.
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. We maintain our choice of the Stanlib SA Property ETF (-0.67%). The Stanlib fund boasts the lowest TER in the segment. For foreign property funds, the Sygnia Itrix Global Property ETF (+1.43%) is the cheapest in this category.
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 (-2.7%) is more conservative, usually suitable for older savers. Mapps Growth ETF (-4.96%) suits investors with a longer-term horizon.
Bond and cash funds
Bonds should find their way into a well-diversified portfolio due to their risk-diversification attributes. If you are investing for a very short period, usually less than a year, then the NewFunds TRACI 3 Month (0.60%) is a natural choice because it is least sensitive to sudden adverse interest rate movements. You can also park your funds in a money market fund if you’ve a lump sum that you wish to put down as a deposit for big-ticket item purchases like a house or car while you shop around.
Those political factors and the shock 3.2% contraction in GDP in the first quarter resulted in Intellidex cutting its forecast for 2019 GDP growth to 0.5% from 1.0%. We believe there is no credible plan on the table to kickstart short-term growth fast enough to have any impact this year. This outlook argues for a balanced portfolio which includes government bonds, value and quality local and offshore stocks as well as alternatives with low correlations to risk assets.
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. However, gaining exposure to both commodities is not a bad idea.
Important note: This ETF does not qualify for a tax-free savings account.
It’s a better option than putting money in a current account that does not earn interest. For a longer investment horizon, protecting your investment against inflation is paramount. We maintain our choice of the Satrix ILBI ETF (-1.18%), 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.
As with equities, investors also need to diversify their bond portfolios internationally. Our choice is the Stanlib Global Bond ETF (3.56%) which tracks investment-grade sovereign bonds mostly issued by the US, UK, Japan and selected European countries. The Stanlib Global Bond ETF has the lowest TER 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 when compared with broad markets, which makes them an excellent portfolio diversifier. Traditionally, gold is the preferred addition to an investor’s portfolio because over longer periods it has shown to be the least correlated.
By Colin Anthony
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