This week's featured ETF is 1nvest SWIX 40 ETF (JSE:ETFSWX). This ETF suits investors with a high risk appetite seeking exposure to SA equities over a long-term investment horizon.
If you'd like to know the investment approach and its portfolio composition, here's the link to the full feature.
Dividend Yield
Highlights
Top Sectors
The 1nvest Swix 40 ETF, which is a variation of the traditional top 40 index, tracks the FTSE/JSE Capped Shareholder Weighted (Swix) Top 40 Index.
It does this (using the JSE’s share register) by reducing constituent weights held by foreign shareholders. This includes adjustments for intercompany and strategic holdings of the companies in the FTSE/JSE Top 40 index, and therefore represents holdings by SA investors only. The 1nvest Swix 40 ETF is the capped version of the Swix Top 40 indices tracked by its peers (Satrix and Sygnia Swix Top 40 ETFs).
What’s happening in the markets?
Tracking only the holdings of SA-based investors enables the Swix to reduce the outsized weights of leading shares. In particular, this was a headache for local investors especially pre-pandemic when tech giant Naspers (that has a 29% stake in Chinese tech company Tencent) dominated local indices with a weighting of 20% or more.
For some context on concentration, Naspers returned 26% to investors in 2019. Of course, this performance benefited investors when the share price was on the rise. However, its share price slumped 18.1% in 2021 when Chinese regulators clamped down on the activities of companies in the tech sector, including Tencent.
This is the downside of highly concentrated (and potentially volatile foreign investor) index weightings which the Swix was formulated to solve.
Accordingly, the top 10 company share weights in the 1nvest Swix 40 ETF, led by Naspers, FirstRand and Anglo American plc, make up only 49.3% of the fund. In contrast, the 1nvest Top 40’s top 10 make up a sizeable 62.5%.
The 1nvest Swix 40 has a tracking error of 0.2%, which suggests relatively high efficiency at tracking its benchmark. It is also superior to our estimate of the Satrix Swix 40 and the reported Sygnia Itrix Swix 40 figure of 0.3%. Also, the 1nvest Swix 40 has the highest dividend yield (4.1%), followed by the Sygnia Itrix Swix 40 (3.7%) and the Satrix Swix 40 (3.4%). However, all the ETF dividend yields are below consumer inflation, which came in at a sticky 7.1% annually in March.
Food and non-alcoholic beverage inflation, which accounts for 17% of Stats SA’s CPI basket, is the main culprit behind SA’s persistent inflation. Data on the food category alone for March show that consumers are paying 14% more for food than they did in March 2022. This increases the likelihood of additional interest rate hikes following the somewhat unexpected 50 basis points increase from the South African Reserve Bank in March. In addition, SA’s electricity woes are expected to contribute to stickier inflation which is above the SARB’s target band of 3%-6%.
As such, Intellidex economists expect further increases of 50 basis points in May and 25 basis points in July, bringing the repo rate to 8.5%.
While higher interest rates increase the cost of credit and existing debt, they can also be beneficial to savers. From an equities perspective, commercial banks have been one of the main beneficiaries of higher interest rates.
A rising repo rate means that banks can charge higher interest rates on new loans (assets for banks) relative to the increased yields they offer on deposits (liabilities for banks). This is a broad definition of net interest income (NII) for banks.
Given that financials make up 26.7% of the fund, we take a closer look at the sector.
The positive effect of the SARB’s rate-hiking cycle reflects across the sector. The results of major banks Absa, Standard Bank and Nedbank (FirstRand – interim) to end-December 2022 showed average growth of 7.2% to R298bn in total home loans advanced to customers. Given that home loans are a sizeable chunk of bank balance sheets, the increase in loans advanced positively affected NII which grew an average of 15.3% to R52.9bn across all four banks over the same period.
Conversely, the tough economic conditions ahead, which include higher interest rates, means that banks will face higher default rates and credit losses (impairment charges on loans as a percentage of total loans). The average credit loss ratio for the banks above increased to 84 basis points from 75 basis points previously.
Overall, whether choosing a Swix 40 or Top 40 ETF to gain broad exposure to SA equities, we think that investors should once again consider all ETF holdings from a portfolio perspective.
Investment term of the week: net interest income
A profitability measure for banks calculated as the difference between income from interest made on loans (assets) and costs from interest paid on deposits (liabilities).
1nvest SWIX 40 ETF (JSE:ETFSWX)
New to investing and want to learn more about other ETFs?
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
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.