Satrix DIVI ETF
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Suitability: This ETF invests in shares that pay high dividends. It is therefore ideal for investors willing to tolerate the higher risk implied by equities but who also need a flow of income that comes from dividends. The ETF is based on an index of high dividend paying stocks. These tend to be larger, mature companies that pay out cash rather than reinvesting it for growth. Such companies typically fall into the “value” classification, with low price:earnings ratios and high book values relative to market value.
What it does: The Satrix DIVI ETF tracks the price and income performance of the FTSE/JSE Dividend Plus index. All dividends received from companies in the index are paid to investors on a quarterly basis net of costs. In order to reduce costs and minimise tracking error, the Satrix Divi fund engages in scrip lending activities with Investec and Sanlam and manufactured dividends that arise are passed on to the fund investors. If you hold the ETF as part of a tax-free savings account with a stockbroker, the dividends will accumulate within the tax-free shelter, but if it is held directly the dividends will be paid in cash to investors outside of the tax-free wrapper.The index is made up of the 30 largest listed companies included in the FTSE/JSE top 40 or FTSE/JSE mid-cap indices (excluding property companies), weighted by the one year forecast dividend yield of companies meeting certain minimum liquidity requirements. The forecast dividend yield is based on consensus forecasts provided by investment analysts to Inet BFA. The fund is rebalanced quarterly in line with the FTSE/JSE index rebalancing methodology.
Advantages
- The fund focuses on income-generating stocks providing income for investors
- It has low concentration risk, with the biggest asset representing only 5.2% of the fund
- In the long run it should, theoretically, outperform other major asset classes such as bonds and cash
Disadvantages
- The fund constitutes mostly mature companies with limited growth prospects
- The disbursal of dividends is a problem for long-term investors looking for capital growth as the cash has to be reinvested
Risk: Controversy rages in investment theory about value stocks. Naysayers argue that the value they represent is because of their low growth expectation and possible future distress. On the other hand, prominent value investors like Warren Buffett argue that low valuations present significant upside potential. This is a 100% investment in equities, a riskier asset class than bonds or cash, but over time a relatively higher return should compensate for volatility.
Fees: The total expense ratio is 0.45%. The costs consist primarily of management fees and additional expenses such as trading fees and other operating expenses.
Historical performance: The performance of an investment in the Satrix DIVI ETF depends on the method used to invest. A lump-sum investment will mimic the ETF performance. However, investing through regular instalments will see the performance lag the ETF, according to historical evidence, and the pattern is apparent in other ETFs too. The performance described in the table below is for a lump-sum investment.
The fund returned an annualised negative 1 year return of about 8% while its 3 years and five year returns, although positive, have lagged the inflation rate. So it has performed poorly as an inflation hedge.
Alternatives: A close peer is the CoreShares S&P South Africa Dividend Aristocrats fund which is also constructed based on dividend payments. Its tracks S&P South Africa Dividend Aristocrats Index, which measures the performance of JSE stocks that follow a policy of increasing or maintaining stable dividends for five consecutive years. This is a young fund and has provided an annualised return of 17.2% since its launch in April 2014.
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