The ETF Monthly Review: September 2018

Colin Anthony
By Colin Anthony September 20, 2018 16:06

The ETF Monthly Review: September 2018

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’s happened in the markets?

  • Financial crises unfolding in Argentina and Turkey
  • SA economy contracts in the second quarter

Our favourite ETFs

  • Domestic equities: CoreShares Equally Weighted Top 40 ETF
  • Foreign equities: Satrix MSCI World ETF and Satrix MSCI Emerging Markets
  • Bonds & 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: Satrix Property ETF

News flash: SA slips into a recession

SA’s second-quarter gross domestic product shrank 0.7%, officially putting the country in a recession. Most investors are wondering what they should do. We address that in this publication.

What’s happened in the ETF market?

The ETF market bounced back resoundingly during August as mostly positive equity returns from the US and SA and favourable currency movements more than offset negative equity returns from emerging markets, Japan, the UK and EU. Intellidex’s picks, excluding the cash ETF, grew 6.75%, slightly ahead of the universe of non-commodity ETFs on the JSE, which grew 6%.

 Local markets

The rand was under pressure during most of August, ending 9.6% weaker. This was on the back of a rampant US dollar, negative sentiment about emerging markets and weak domestic economic data releases.

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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 five broad categories:

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

Various empirical studies show that the bulk of equity returns stem from diversification among broad asset classes rather than to 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.

further split equities into geographic groupings. We then add a category for equity ETFs with an income theme.

Our picks in the above categories 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 want to choose asset classes that 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 over-concentration, a good ETF should cap its exposure to a single sector and/or a single counter. While costs may no longer be a big issue in developed markets where they have declined significantly and do not differ much across different products, they still are an issue in SA. We prefer ETFs with low total expense ratios (TERs).

An overview of our favourite funds for each category follows.

The September favourites:

Domestic equity: CoreShares Equally Weighted Top 40 ETF

SA is facing a myriad of headwinds ranging from a recession and heightened risk of a downgrade of its credit rating to a volatile currency. Given this outlook we decided to change our pick for this category to the CoreShares Equally Weighted Top 40 ETF. We dropped our previous pick, the Satrix SA Quality ETF, because it is too geared towards companies that generate most of their income locally. Such companies will not fare well should the locally economy remain under pressure as is predicted by ours models. The fund is also a heavy consumer play.

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prices and a weakening rand. Resources are now up an impressive 15.1% in the year to date. Financials and industrials were largely flat during August.

Bonds – both inflation-linked (Ilbi) and vanilla-type (Albi) – declined on fears of a downgrade of SA’s credit ratings due to a weakening fiscus. The yield on the benchmark government debt due in 2026 increased 38 basis points, suggesting that investors are requiring higher compensation to hold SA bonds.

The star performers on the ETF market were the New Funds S&P GIVI South Africa Resources Index ETF and Satrix Resi ETF, which gained 6.9% and 5.93% respectively.

Looking ahead, we expect the domestic economy to remain on the back foot in the short to medium term. We think the drivers of a recovery are simply not there in 2018 and are set to only slowly emerge in 2019 after elections. Consumer spending is likely to remain under pressure given a slew of negative news while investment by companies to expand is not likely to pick up until after the elections. Funds with significant exposure to SA’s GDP, such as local consumer plays and bonds, are likely to underperform. However, we see underlying resilience in the private sector preventing a more dramatic or prolonged recession.

We searched for a well-diversified fund which has a weak correlation with the local economy and has rand hedge qualities. CoreShares Equally Weighted Top 40 came out tops. The main weakness with its peers which also invest in the top 40 index is that they don’t apply diversity weightings, which causes concentration in a few large counters. For instance, Naspers accounts for more than a fifth of the top 40 index. The Coreshares Equally Weighted Top 40 ETF overcomes this by investing equally un all 40 constituents. The fund returned 1.88% during August


Foreign equities, developed markets: Satrix MSCI World ETF

The international equities offering of the JSE has been expanding. It started off with broad-based themes but now includes property funds and, more interestingly, technology funds. Again, our first priority is a broad-based fund. However, technology is a theme that is lacking in our local funds generally and, given its ever-increasing role in

our lives, South African investors ought to gain increased exposure to technology funds to complete their portfolios and enhance sector diversification. Three new technology theme funds are: Sygnia/Itrix 4th Industrial Revolution; Stanlib S&P 500 Info Tech Index Feeder; and Satrix Nasdaq 100.

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International markets:

US equities topped the performance ledger of the developed markets as trade tensions appear to be having a benign impact on investor sentiment within the US. The MSCI USA index, which gives a good indication of the performance of US equities, gained 3.3% on the back of robust macro data.

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This, coupled with the rand which weakened 9.6% during August, propelled all US-focused funds to the top of the local ETFs performance table. US bond ETFs also performed strongly.

In Europe, the easing of trade tensions with the US and better-than-expected second-quarter GDP growth didn’t do much to lift equities. Banks were under pressure amid concerns about exposure to emerging markets. The MSCI Europe index fell 3.06% during August but because of the weaker rand, Sygnia/Itrix Eurostoxx 50, the only ETF which tracks European stocks, gained 7.04%.

Japan and the UK also reported upbeat second-quarter GDP numbers. Japan’s GDP growth came in at 1.9% quarter on quarter while the UK grew 1.6%.  Equity markets in both countries were also under pressure, which dented the performance of Sygnia/Itrix FTSE 100, Sygnia/Itrix MSCI Japan and to a lesser extent world ETFs.

Emerging markets were a bit volatile during August. The MSCI emerging markets index, which is tracked by Satrix MSCI Emerging Markets ETF, lost 2.7% (-0.5% in local currencies) as potential

financial crises in Turkey and Argentina triggered capital withdrawals from risky assets in most emerging markets.

The Turkish lira came under pressure after US President Donald Trump’s decision to increase tariffs on Turkish steel and aluminium imports because of the imprisonment of a US citizen in Turkey. In Argentina, the currency was sold off following President Mauricio Macri’s request to accelerate the disbursement of the International Monetary Fund’s (IMF’s) $50bn bailout package. Both events exacerbated the problems in emerging markets that were suffering from trade wars.

Prospects for developing economies remain strong despite the trade wars and geopolitical tensions. The IMF expects advanced economies to continue expanding this year and next before decelerating. It argues that the global economic upswing that began around mid-2016 has become broader and stronger. Emerging market and developing economies are also expected to grow. This outlook coupled with an increasingly fragile outlook for the rand bodes well for international ETFs. [End]

However, our anchor portfolio in the international ETF category is the Satrix MSCI World Equity Feeder ETF (up an impressive 12.97% in August). The Satrix MSCI fund has exposure to the developed markets of the US, Europe, Japan, Canada and Australia.

Foreign equities, developing markets: Satrix MSCI Emerging Markets ETF

The choice in this segment is limited to two funds: Satrix MSCI Emerging Markets (up 7.68% in August) and the Cloud Atlas AMI Big50 (up 15.64% in August). Our choice of the Satrix fund is motivated by its diversification. It provides exposure to high-growth economies such as China and India, which are not included in any of the developed market funds, thus offering further diversification. The Satrix ETF, with a TER of 0.4%, tracks the MSCI Emerging Markets Investable Markets index, which captures companies across 23 countries. The Cloud Atlas AMI Big50 fund has a higher TER of 0.75%. 

Bond and cash funds

Bonds and cash are good additions to portfolios not only because of their diversification qualities but also for their ability to enhance returns. The recent launch of two new ETFs by Stanlib and Ashburton that track foreign sovereign bond markets widens the choice in the segment.

If you are investing for a very short period, usually less than a year, then the NewFunds TRACI 3 Month (up 0.54% in August) is a natural choice because it is least sensitive to sudden adverse interest rate movements. It is similar to earning interest on your cash at the bank with a minimal possibility of capital loss.

However, for a longer investment horizon, protecting your investment against inflation is paramount. We therefore maintain our choice of the Satrix ILBI ETF (down 0.26% in August) 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.

In addition to the local bond ETFs, investors now have an option to choose from foreign bond ETFs on the JSE: Stanlib Global Bond ETF, Ashburton World Government Bond ETF and the FirstRand Dollar Custodian Certificate ETF.  Of the three we are undecided between the Stanlib Global Bond ETF and Ashburton World Government Bond ETF. Both are feeder funds that track the performance of fixed-rate, local currency, investment-grade sovereign bonds. These are mostly issued by the US, UK Japan, and selected European countries.  Their TERs differ by just 0.05 percentage points with the Stanlib Global Bond ETF being the cheapest.

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. Naturally, Satrix Dividend Plus and CoreShares S&P South Africa Dividend Aristocrats come to mind here, but similarly, property funds are high dividend payers.

There are two investable property indices available: SA listed property and the capped property index. We maintain our choice of the capped fund Satrix Property ETF (up 2.36% in August), which has the lowest expected TER in the segment. However, investors with a stomach for exchange rate volatility can consider foreign property ETFs. The Sygnia Itrix Global Property ETF (up 12.12% in August), with a TER of 0.25%, is by far the cheapest of the three.

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Multi-asset ETFs

If you find the process of diversifying your portfolio daunting, two ETFs do it for you. They combine equities and bonds to produce a diversified portfolio for two investor archetypes. They are the NewFunds Mapps Protect ETF and the NewFunds Mapps Growth ETF. They are designed to meet two different risk appetites: Mapps Protect is more conservative, suitable for conservative, usually older, savers. Mapps Growth suits investors with a long-term horizon. They rose 0.16% and 0.69% respectively in August.

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Colin Anthony
By Colin Anthony September 20, 2018 16:06

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