db X-tracker MSCI World Index ETF
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Suitability: If you are an investor seeking rand-hedge developed market exposure through a well-diversified equity portfolio at low cost, then the db X World ETF is highly suitable. It is an ideal choice for investors with a long-term (more than five years) investment horizon who can tolerate short-term volatility. It provides exposure to the performance of 23 developed markets (including the US, Europe, Japan, Australia and Canada). It therefore provides a hedge against rand weakness and a mechanism to diversify your portfolio exposure globally. It is the broadest international ETF available in SA and has lower costs than equivalent actively managed funds. Investing in this ETF does not affect any exchange control limits as it is rand settled. Allocating some of a portfolio to offshore exposures using an instrument like this is a good idea to achieve portfolio diversity.
What it does: The ETF tracks the price and yield performance of the MSCI world index by holding a portfolio of securities in the same proportion as the basket of securities that make up the index. Essentially, an investment in this ETF tracks the developed world’s equity markets. The index is a free float-adjusted market capitalisation index that is designed to mimic the equity performance of 23 developed markets, representing large- and mid-capitalisation companies with a total market capitalisation of $30-trillion. A free-float adjusted market capitalisation format is based on the market capitalisation of each company excluding locked-in shares such as those held by promoters, founders and governments. The weightings of each investment of the ETF are in proportion to the value of available shares for that company. The index is reviewed quarterly (in February, May, August and November) with the objective of reflecting change in the underlying equity markets in a timely manner, while limiting the costs incurred by index turnover. During the May and November reviews, the index is rebalanced.
Advantages: The ETF offers easy access to companies on various developed world stock exchanges through one investment at a low cost. Most companies are multinationals with business interests span various continents, generating earnings in multiple currencies. The rand’s severe depreciation over the past few years means the foreign currency return component of this instrument has been substantial.
Disadvantages: The ETF has a disproportionate exposure to the US market, with 59% invested in US-domiciled companies. Therefore, US macroeconomic developments have a pronounced effect on the fund’s performance. However, it is well diversified at individual asset holdings level, with its biggest investment in Apple constituting only 2.1% of the fund, which mitigates the risk.
Risk: This is a 100% investment in equities, which is a riskier asset class than bonds or cash. It is likely to be volatile, but the returns over time should compensate for volatility. We think the sectoral, geographical and currency diversity of the constituent companies diminishes the risks to a degree.
Fees: Fees take a total of 0.68% out of fund’s returns each year, a comparatively low cost. For every R1 000 invested, R6.84c goes to fees. This ETF offers the lowest fees in its category. Additional costs to investors associated with trading the ETF include bid-ask spreads and brokerage fees.
Historical performance: The db X World holds up well against its peers. Over the past five years the fund had an annualised return of nearly 22%, of which nearly 17% was due to foreign currency returns.
Alternatives: Because there are no other ETFs which track the MSCI world index listed on the JSE, the next logical alternatives would be ETFs that track stocks listed on various developed markets. There are a number of developed market index trackers.
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