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Satrix SA Bond ETF: an ETF with South African bond market exposure!

Written by TeamEasy | Jun 28, 2023 10:00:00 PM

This week's featured ETF is Satrix SA Bond ETF (JSE:STXGOV). This ETF is suitable for investors with a medium risk appetite seeking exposure to SA government bonds.

To know the investment approach and the portfolio composition of this ETF, you can use this link to the full feature.

Dividend Yield

  • 13%

Highlights

  • SA bonds are attractive because they return higher yields than developed market counterparts.
  • The rand is one of the most liquid currencies in the world having remained in the top 20 of the world’s most traded currencies
  • An attractive feature about including bonds in one’s portfolio is that they offer diversification benefits
  • Investors’ loss of confidence in a country’s leadership or growth path is often reflected in the sale or loss of appetite for sovereign bonds. 
  • Investment term of the week:  Sub-investment grade bonds

 

Top Holdings

  • Bonds 12 Years – 37.6%
  • Bonds 3 – 7 Years – 33.9%
  • Bonds 7 -12 Years 28.5%

What’s happening in the markets?  

SA’s inflation is declining but not fast enough to be within the SARB’s target range of 3-6%. 

Latest data from StatsSA show that inflation eased to an annualised 6.3% in May from 6.8% in April. Core inflation – which excludes volatile items such as food and energy – slowed slightly to 5.2% from 5.3%, which implies that inflation is broad-based across various groups.

Although food inflation has declined, it remains on double-digit growth as it dropped to 12% from 14.3% in April. Transport inflation slowed to 7% (from 7.6% in April) and contributed 1.0 percentage point to headline inflation. Housing & utilities was almost flat, coming in at 4.0% (from 4.1% in April), adding 0.9 of a percentage point to headline inflation.

Intellidex economists believe that upside risks to inflation include to OPEC oil production cuts, supply chain disruptions, loadshedding and the weaker rand.

With SA bonds offering higher yields, which is beneficial for investors given the prevailing inflationary environment, this week we turn our focus to the Satrix SA Bond ETF. SA bonds are attractive because they return higher yields than developed market counterparts. SA’s 10-year bond has a yield of about 10.7% while developed markets such as the UK have a yield of 4.4% on the 10-year bond. 

Inflationary risks are numerous. Brent crude oil is down about 11% year-to-date. In a bid to increase these prices, OPEC held a meeting last month to curtail production, an effect which may be detrimental so SA’s inflation prospects. Loadshedding does not only inflate companies’ expenditure on diesel or alternative sources of power, it also dampens revenue growth, which squeezes profit margins. 

The rand is one of the most liquid currencies in the world having remained in the top 20 of the world’s most traded currencies, according to the Bank of International Settlement’s October 2022 report. The currency has depreciated about 16% against the dollar year-to-date, which does not bode well for SA as we are a net importer. A weaker rand leads to higher prices for foreign currency denominated goods.

Investors’ loss of confidence in a country’s leadership or growth path is often reflected in the sale or loss of appetite for sovereign bonds. 

According to the SARB March 2023 quarterly bulletin, about 88.5% of SA’s bonds are issued in local currency, which implies that international investors need to convert their respective currencies to rands to purchase our bonds. Therefore, higher demand for SA sovereign bonds leads to a stronger rand, and vice versa.

A lower demand for government bonds leads to a higher yield and the opposite is also true. Bond yields are determined by a multitude of factors such as sovereign credit rating, GDP growth, debt-to-GDP ratio, government revenue and expenditure. Sovereign credit rating agencies determine a sovereign’s probability of default based on the above-mentioned factors, among other things.

In May, the demand for SA bonds dipped to the lowest average this year as primary dealers sold R11bn worth of bonds, according to the SARB. This was despite SA bond yields being attractive – offering the highest yields since the beginning of the Covid pandemic.

At the start of this year, the SA 10-year bond yield was 9.9% while the 5-year yield was at 8.6%. Thes yields have ticked up this year mainly due to power constraints and lacklustre economic growth. At the time of writing the SA 10-year bond yield was about 10.7% and the 5-year bond at 9.3%, while US 10-year bond yield at 3.7%. implying a risk premium of about 7% over SA’s 10-year bond. 

An attractive feature about including bonds in one’s portfolio is that they offer diversification benefits because they have a low correlation with traditional equity returns. Although SA bonds are in the sub-investment grade bracket, they have a low probability of default and they pay a premium for risk. 

The Satrix SA Bond ETF has returned 6.1% over the last year and 7.2% since inception. It has a total expense ratio of 0.25%, which is lower than 1nvest’s 0.29%, and a portfolio size of R650m. The fund distributes four times a year and has a distribution yield of 13.1%

Investment term of the week:  Sub-investment grade bonds

Sub-investment grade bonds are bonds with a credit rating below investment grade as judged by bond ratings agencies. The ratings are the opinion of the agency and they are not a guarantee of credit quality, probability of default, or recommendation to buy or sell.

Satrix SA Bond ETF (JSE:STXGOV)

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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

Disclaimer

This research report was issued by Intellidex (Pty) Ltd. Intellidex aims to deliver impartial and objective assessments of securities, companies or other subjects. This document is issued for information purposes only and is not an offer to purchase or sell investments or related financial instruments. Individuals should undertake their own analysis and/or seek professional advice based on their specific needs before purchasing or selling investments. The information contained in this report is based on sources that Intellidex believes to be reliable, but Intellidex makes no representations or warranties regarding the completeness, accuracy or reliability of any information, facts, estimates, forecasts or opinions contained in this document. The information, opinions, estimates, assumptions, target prices and forecasts could change at any time without prior notice. Intellidex is under no obligation to inform any recipient of this document of any such changes. Intellidex, its directors, officers, staff, agents or associates shall have no liability for any loss or damage of any nature arising from the use of this document.

Remuneration

The opinions or recommendations contained in this report represent the true views of the analyst(s) responsible for preparing the report. The analyst’s remuneration is not affected by the opinions or recommendations contained in this report, although his/her remuneration may be affected by the overall quality of their research, feedback from clients and the financial performance of Intellidex (Pty) Ltd.

Intellidex staff may hold positions in financial instruments or derivatives thereof which are discussed in this document. Trades by staff are subject to Intellidex’s code of conduct which can be obtained by emailing mail@intellidex.coza.

Intellidex may also have, or be seeking to have, a consulting or other professional relationship with the companies mentioned in this report.