Exchange Traded Fund (ETF) Analysis: NewFunds NewSA Index Fund

Mayo Twala
By Mayo Twala September 7, 2018 11:38

Exchange Traded Fund (ETF) Analysis: NewFunds NewSA Index Fund

 

Intellidex | 7 September 2018

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Exchange Traded Fund (ETF) Analysis

NewFunds NewSA Index Fund

Performance review: The first half of 2018 has been mostly subdued for domestic equities. The JSE all share index surrendered some of the gains it made during the second half of last year. The poor first-quarter GDP numbers for South Africa and the uncertainty caused by the land debate seem to have dampened investor sentiment.

Irrespective of the underperformance, the NewFunds NewSA ETF returned an impressive 14.91% in the year to end-June. Since inception in 2008 it has returned an average of 12.92% a year while the JSE top 40 yielded 10.19%.

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Outlook: Consumer service and financial stocks make up more than half of the fund’s holdings. The performance of both sectors is closely tied to that of the general economy and the outlook is rather bleak for SA. Second-quarter GDP data released recently showed the economy contracted 0.7% quarter on quarter, following a 2.6% decline in the previous quarter. The two consecutive quarters of a shrinking economy officially puts in a technical recession. SA’s distressed economy will continue to weigh on equities. The global economy, however, is in better shape. Global commodity prices have been recovering nicely following a more synchronised global economic recovery, particularly in Asia.

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Top Holdings: A glance at the top holdings chart immediately shows that the fund is dominated by Naspers. Financial services companies also have a strong presence.

Key facts:

Suitability: This fund invests in equities, which may undergo periods of high volatility and are suitable for long-term investors with an appetite for risk. Equities are known to grow ahead of inflation and other asset classes over longer investment horizons. Moreover, the NewSA ETF caters to investors who wish to invest in companies that support socioeconomic transformation.

Methodology: The NewSA ETF invests in the JSE’s top 40 companies that have superior BBBEE ratings. It tracks the price performance of the NewSA index, which is a modified FTSE/JSE Top 40 index that weights the top 40 JSE-listed companies in accordance with their empowerment ratings. These ratings are calculated according to the department of trade and industry’s codes of good practice on BBBEE. This enables investors to contribute towards transformation.

Risk: As many of the fund’s constituents operate in offshore markets, rand fluctuations affect returns. The NewSA fund has a high level of concentration risk in that Naspers makes up more than a third of the fund’s holdings. Therefore, should the Naspers share price fall, the entire fund’s performance will be dented. Financial services companies are also prevalent in the top 10, so that sector’s performance will also influence the fund’s returns.

Fees: The annual total expense ratio (TER) for the NewFunds NewSA top 40 is 0.54%, which is costly compared with Absa’s other ETFs.

Alternatives: There are no direct peers that invest only in companies with high BBBEE scores.

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 EasyEquities 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 or bonds 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

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Mayo Twala
By Mayo Twala September 7, 2018 11:38

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