ETF ANALYSIS: Industrials sector ETF

Mayo Twala
By Mayo Twala September 7, 2018 11:55

ETF ANALYSIS: Industrials sector ETF

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ETF ANALYSIS

Industrials sector ETF,  including Satrix Caped Industrials 25 and NewFunds S&P Givi Industrials 25

Performance review:  Industrials had a strong run over the past decade. The industrials index (J257) grew a staggering 254% surpassing financials (J580) and resources (J258) which grew 135% and -24% respectively.

The industrials index benefited from its exposure to the likes of Naspers, Richemont, MTN which have established themselves not just as South African but global brands. Naspers share price for instance grew 1,757% which is equivalent to growth of 34% a year over the ten-year period.

However, industrials have been under pressure since the beginning of the year. The industrial index lost 9% amid a blood bath at the top end of the index. MTN and British American Tobacco which occupy the third and fourth positions in the index lost 19.4% and 16% respectively. Remgro, another influential constituent shed about 14% while Naspers, the biggest constituent, ended the first half 3% down. Richemont which gained 4% was the only top 5 constituent which had a positive return.

The two ETFs which tracks industrials were not spared. Satrix Indi 25 ETF lost 4.69% while NewFunds S&P Givi 25 lost 7.17% respectively. Despite a poor first half performance. However, Satrix Capped Indi 25 still command an impressive growth of 16.69% a year over the 10 years to end-June which makes it the best performing fund over that period.

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The noticeable differences in the historical performance of the ETFs and their benchmark is largely due to the different methodologies they use in selecting constituents. Satrix Indi 25, which has historically been the better of the two, selects its constituents based on their market capitalisation.  It invests in 25 largest industrials by market capitalisations. The attraction of this methodology is that it reflects market performance and hence the fund increases its exposures to stocks which will be performing well at that time while avoiding those which will be declining. The potential flaw though is that the methodology tends to increase its exposure expensive stocks.

NewFunds S&P Givi Indi 25 on the other hand selects its constituents based on what it calls “intrinsic value” which is a metric calculated from the financial indicators of the constituents. This is not directly linked to the share price performance of the constituents.

Outlook:  The industrials index at the JSE is dominated by consumer goods, consumer services and healthcare stocks. While most of its constituents, particularly consumer goods are and health care, are somewhat defensive in nature, they thrive when the economy is doing well, and consumer spending is strong. The domestic economy started the year on a back foot, but most analysts expect it to recover. The national treasury department is projecting growth of 1.5% in 2018 and 1.8% in 2019. However, medium to long term prospects hinge on the ability of Ramaphosa’s government to push through reforms that support a recovery in growth.

The industrials index also have global players which generate significant portions of their revenue from China, Nigeria, Europe and other economies across the world.  Global economic growth and the rand/dollar exchange rate matter for those counters.

Overall, we think industrials index is an interesting index to watch. It houses very promising companies which are aggressively expanding into Africa and the rest of the world.

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Top holdings: The top 10 holdings make up 81.27% and 84.6% of the Satrix and GIVI INDI respectively.  Both funds have allocated most weight in the Consumer service largest contributing sector followed by the Consumer goods sector. The leading constituents’ sectors makes above 65% of the etf leading sectors. The ETF’s lack diversification, the top two constituents in both funds weigh over 45% of the holding. Thus, should the leading sectors dominant constituent drop in value, the etf returns will be badly affected. Since over 50% of the etf will be negatively impacted. This diminishes the diversification benefits one usually obtains from the ETFs’.

Key facts:

Suitability: Both funds are aggressive fund. Suitable for long-term investors with an appetite for risk, as they may undergo periods of high volatility. It offers investors a blend of domestic and international exposure.

Risk: Most constituents operate in offshore markets, so rand value fluctuations affect the fund’s returns. Both funds have allocated 31% of their weight to Naspers and BAT and that reduces diversification benefits since they are both consumer driven. However, GIVI INDI is riskier since it’s benchmark constituents are more exposed to risk as compared to Satrix benchmark constituents that are capped at 30%.

Fees: The annualised total expense ratio (TER) for this fund is 0.43%, making it one of the most expensive etf when compare to that of GIVI INDI at 0.23%.

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. 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 numerous companies in a single transaction. ETFs can be traded through your broker in the same way as shares, say, on the Easy Equities platform. In addition, they qualify 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 the etf is exposed to the whole market/ asset classes
  • 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

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Mayo Twala
By Mayo Twala September 7, 2018 11:55

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