Each month, the investment gurus at Intellidex scan the market to come up with a list of their favorite ETFs. Learn more about their top picks this month here.
Domestic equity
Foreign equity
Bonds and cash
Dividends
Resilience in the local economy but limited improvement in the macroeconomic environment
The JSE was up 1.3% in the month of June led by shareholder-weighted and capped indices. Recovery in June was spearheaded by financials which rose by 11.4% with industrials 3.7% higher. However, resources were a drag on the JSE with losses of -8.2% during the period while banks and retailers gained 13.0% and 16.1%, respectively. On the back of a simplified structure, Naspers and Prosus both rose by 14.2% and 6.2%, respectively, while property was relatively flat at 0.9%.
For developed markets, June was mostly positive. The S&P500 was up 6.5% while the Nasdaq gained 6.6% with the MSCI World notching up gains of 5.9%. In the UK, the FTSE100 was up marginally by 1.1%, Germany’s Dax rose 3.1%, France’s CAC 40 was up 4.2% while the Hang Seng rose 3.7% during the period. Overall, the ETF picks below reflect our continued preference for diversified ETF portfolios, especially given our earlier indications of the risk of persistent inflation and the resultant possibility of higher volatility in equities.
Overall, the ETF picks below reflect our continued preference for diversified ETF portfolios, especially given our earlier indications of the risk of persistent inflation and the resultant possibility of higher volatility in equities.
Domestic equity: Satrix FINI 15 ETF (STXFINI) and Satrix INDI 25 ETF (STXINDI)
This month’s core pick reflects our view that any allocation to SA equities should remain diversified and resilient, given the persistent challenging stagflationary environment despite the recent decline in inflation. On this basis, the Satrix FINI 15 ETF (+11.2% in June) provides investors with the price performance of the FTSE/JSE Financial 15 index and also pays investors all dividends received from companies in the index, net of costs, on a quarterly basis. The Fund engages in scrip lending activities. Manufactured (taxable) dividends could arise from such transactions.
Typically, rising interest rates imply higher income for banks. However, as the economy deteriorates, the question of sustainability cannot be ignored. It is increasingly a race between the endowment effect of net interest income versus the drag of rising impairments, credit losses, funding costs and a slowdown in the growth of the balance sheet. On aggregate the positive benefits of rising rates on net interest income have outweighed the negative impact of higher bank funding costs and rising impairments. But with interest rate increases plateauing and impairments rising, the next few months will be tough for bank profitability. However, on the assumption of the continued slowdown of inflation during 2023, this may provide some relief for consumers and may limit impairments and credit losses for banks. This would potentially support income for banks and ultimately increase returns for investors invested in the Satrix FINI 15 ETF. However, drawbacks of the ETF include its high total investment cost (0.43%) and dividend yield (4.18%), which is below SA’s 5.4% inflation rate.
Our satellite pick is the Satrix INDI 25 ETF (+4.3% in June), which provides investors with the price performance of the FTSE/JSE Capped Industrial 25 index (J311) as well as pays out, on a quarterly basis, all dividends received from companies comprising the index, net of cost. In order to reduce costs and minimise tracking error, the fund engages in scrip lending activities.
Manufactured (taxable) dividends could arise from such transactions. Manufacturing production in South Africa increased by 2.5% year-on-year in May of 2023, following an upwardly revised 3.6% surge in the prior month and above market forecasts of a 2.3% rise. The ETF has a TIC of 0.44% and a projected yield of 1.19%.
Satrix FINI 15 ETF (STXFINI) and Satrix INDI 25 ETF (STXINDI)
Foreign equity: Satrix S&P 500 Feeder ETF (STX500) and Satrix Emerging Markets 50 ETF (STXEMG)
Our core global equities pick is the Satrix S&P 500 ETF (+1.8% in June) which tracks the value of the S&P 500 Index. The Funds is an index tracking fund, registered as a CIS, and is also listed on the Johannesburg Stock Exchange as an ETF. The portfolio will invest in participatory interest of the iShares Core S&P 500 UCITS ETF. The iShare Core S&P 500 UCITS ETF replicates the constituents of the S&P 500 Index by holding all the securities comprising the S&P 500 Index in a similar proportion to their weightings in the S&P 500 Index. The investment objective of the underlying fund is to provide investors with a total return, taking into account both capital and income returns.
This ETF has its largest exposure to the technology sector, which accounts for c.33% of the industry sector weighting while the investment by country is mainly in the US with a weighting of c.97%. Therefore, performance is subsequently by macroeconomic factors in this market. As stated above, inflation in the US has continued to trend downwards with revised upward economic growth underpinned by solid consumer spending. Further evidence of the state of good health of the US economy has been revealed in the results of technology giants Alphabet (Google) and Microsoft. Alphabet’s second-quarter profits exceeded market expectations while Microsoft benefitted from product upgrades which resulted in its 4th-quarter revenue and profit surpassing Wall Street expectations. Performance of these tech giants underpin the rally of the S&P 500 of around 19% on a year-to-date basis. As such, we think that the Satrix S&P 500 ETF’s exposure to the strong US market and innovative technology sector, enables investors to invest in top-quality global equities while participating in any sustainable technological advancements over the medium to long term.
Our satellite (or higher risk pick) is a typical value play. The Satrix Emerging Markets 50 ETF (+0.5% in June) is a high-risk, passively managed index-tracking fund registered as a collective investments scheme and listed on the Johannesburg Stock Exchange as an exchange traded fund.
The objective of the fund is to achieve long term capital appreciation in tracking the performance of the MSCI Emerging Markets 50 (MSCI EM 50 Index) (benchmark index). It also aims to replicate the price and yield performance of the MSCI Emerging Markets 50 Index as closely as possible by holding a portfolio of securities equivalent to the basket of securities that comprise the Index, and in similar weightings to the Index.
Satrix S&P 500 Feeder ETF (STX500) and Satrix Emerging Markets 50 ETF (STXEMG)
Bonds and cash: FNB Inflation Bond ETF (FNBINF)
We favour an inflation-linked bond ETF in which the principal price of the bonds (as well as the interest payments) rise and fall with the rate of inflation, thus protecting the purchasing power of investors. In addition, bonds may improve the diversification of portfolios given their low correlation with equities.
Accordingly, the FNB INF ETF (+0.7% in June) is our pick for this month. The investment objective of the ETF is to provide investors with a real rate of return above inflation (CPI), through exposure to a diversified portfolio of government inflation-linked bonds. The ETF invests in bonds based on the value issued by National Treasury and the listed value on the JSE. The ETF aims to track the performance of the FTSE/JSE IGOV Index.
The IGOV is a weighted basket of South African government inflation-linked bonds. The ETF tracks the component bonds of the index in proportion to the index weightings. Inflation returns interest to investors quarterly. The ETF has a TIC of 0.37% and a projected yield of 2.78%.
FNB Inflation Bond ETF (FNBINF)
Dividends: Satrix SA Divi ETF (STXDIV)
The Satrix SA Divi Plus ETF (+1.9% in June) is our dividend pick for this month. The investment objective of the ETF is to track the FTSE/JSE Dividend Plus index. ETF is an index tracking fund, registered as a Collective Investment Scheme and is also listed on the JSE Securities Exchange as an Exchange Traded Fund.
The Fund provides investors with the price performance of the FTSE/JSE Dividend Plus index (J259) as well as pays out, on a quarterly basis, all dividends received from companies comprising the index, net of cost.
In order to reduce costs and minimise tracking errors, the fund engages in scrip lending activities. Manufactured (taxable) dividends could arise from such transactions.
The ETF has a TIC of 0.41% and a projected yield of 8.72%, which is above the SA inflation rate of 5.4%.
Satrix SA Divi ETF (STXDIV)
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.