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Johannesburg - Investors are paying more attention to exchange-traded funds (ETFs) which operate on a fundamental basis rather than simply a weighting in the JSE Top 40 index.
Over the last two years the so-called RAFI ETFs have become popular with SA investors who have become wary of the Top 40 bias towards resource stocks.
For instance, heavyweight stocks BHP Billiton and Anglo American make up 26.3% of the index when measured by the Satrix-managed Top 40 and the RMB BIPS Top 40, with six of the resource companies making up roughly 50% of the JSE Top 40.
This bias towards resources has meant that investors have considered using alternative products when looking to buy exposure to the JSE Top 40.
Mike Brown, managing director of online trading platform ETFSA.co.za, explains: "The RAFI methodology ranks and weights such shares based on fundamental valuation metric, namely sales, cash flows, book prices and dividends.
"An index is constituted of 40 of the top 100 local companies based on this fundamental metric method. In the enhanced fundamental indexation method, for which Plexus has the local licence, two additional filters are added to the valuation technology, namely the quality of earnings and financial distress."
Plexus is a local asset management firm.
Brown explains that for investors or clients who want access to the commodity cycle and are seeking rand hedge exposure, the market capitalisation Top 40 products like Satrix 40 and BIPS 40 are "ideal".
However, more cautious investors who wish to reduce short-term volatility and the influence of factors such as the exchange rate and commodity prices may do better to look at products like the Satrix SWIX Top 40 or the Nedbank Capital BettaBeta QWT 40.
With many of the fundamentally-focused ETFs new to the SA investor, they have flown beneath the radar of retail investors. The BIPS Top 40 has delivered 19.27% over 12 months, while the NewFunds eRAFI (Absa Capital) has returned 21% - just underperforming the Satrix RAFI 40 which delivered 22.68% over the same period.
The Nedbank BettaBeta only has a three-month trading history and has returned 12.77% over the period.
A look at performance figures for tracking funds over the last five years makes for interesting reading.
The Satrix INDI ETF, which tracks the industrial shares on the JSE, remains the best performing fund delivering 16.95% per annum. This is followed by the Stanlib Index Fund (14.41%) and the Satrix 40 ETF (12.80%).
On a three-year basis, the dividend-focused products outperformed with the Satrix DIVI, which selects shares in its portfolio based on their dividend payment potential (11,12% p.a.) and property shares, with their high yield, such as Prudential Enhanced SA Property Fund (11,20% p.a.) offering the best returns.
According to Deborah Fuhr, global head of ETF research and implementation strategy at US asset manager Blackrock, the global ETF industry has 2 379 ETFs with 5 204 listings and assets of $1.18 trillion from 129 providers on 45 exchanges around the world.
In September 2010, US-domiciled ETFs and other exchange-traded products (ETPs) experienced net inflows totalling $28bn.
Equity-focused ETFs saw $24.7bn net inflows, of which $18.8bn went into North American equity products and $5.6bn into emerging markets equity ETFs.
Fixed-income ETPs saw net inflows of $1.5bn, of which $0.9bn went into high yield products and $0.7bn into corporate bond offerings.
Commodity ETPS saw inflows of $1.1bn of which $1.2bn went into precious metals products, while broad commodity exposure saw net outflows of $0.2bn.
- Fin24.com
* The writer holds ETFs in Satrix RAFI, Absa Capital ERAFI and Nedbank Capital BettaBeta QWT 40.
Over the last two years the so-called RAFI ETFs have become popular with SA investors who have become wary of the Top 40 bias towards resource stocks.
For instance, heavyweight stocks BHP Billiton and Anglo American make up 26.3% of the index when measured by the Satrix-managed Top 40 and the RMB BIPS Top 40, with six of the resource companies making up roughly 50% of the JSE Top 40.
This bias towards resources has meant that investors have considered using alternative products when looking to buy exposure to the JSE Top 40.
Mike Brown, managing director of online trading platform ETFSA.co.za, explains: "The RAFI methodology ranks and weights such shares based on fundamental valuation metric, namely sales, cash flows, book prices and dividends.
"An index is constituted of 40 of the top 100 local companies based on this fundamental metric method. In the enhanced fundamental indexation method, for which Plexus has the local licence, two additional filters are added to the valuation technology, namely the quality of earnings and financial distress."
Plexus is a local asset management firm.
Brown explains that for investors or clients who want access to the commodity cycle and are seeking rand hedge exposure, the market capitalisation Top 40 products like Satrix 40 and BIPS 40 are "ideal".
However, more cautious investors who wish to reduce short-term volatility and the influence of factors such as the exchange rate and commodity prices may do better to look at products like the Satrix SWIX Top 40 or the Nedbank Capital BettaBeta QWT 40.
With many of the fundamentally-focused ETFs new to the SA investor, they have flown beneath the radar of retail investors. The BIPS Top 40 has delivered 19.27% over 12 months, while the NewFunds eRAFI (Absa Capital) has returned 21% - just underperforming the Satrix RAFI 40 which delivered 22.68% over the same period.
The Nedbank BettaBeta only has a three-month trading history and has returned 12.77% over the period.
A look at performance figures for tracking funds over the last five years makes for interesting reading.
The Satrix INDI ETF, which tracks the industrial shares on the JSE, remains the best performing fund delivering 16.95% per annum. This is followed by the Stanlib Index Fund (14.41%) and the Satrix 40 ETF (12.80%).
On a three-year basis, the dividend-focused products outperformed with the Satrix DIVI, which selects shares in its portfolio based on their dividend payment potential (11,12% p.a.) and property shares, with their high yield, such as Prudential Enhanced SA Property Fund (11,20% p.a.) offering the best returns.
According to Deborah Fuhr, global head of ETF research and implementation strategy at US asset manager Blackrock, the global ETF industry has 2 379 ETFs with 5 204 listings and assets of $1.18 trillion from 129 providers on 45 exchanges around the world.
In September 2010, US-domiciled ETFs and other exchange-traded products (ETPs) experienced net inflows totalling $28bn.
Equity-focused ETFs saw $24.7bn net inflows, of which $18.8bn went into North American equity products and $5.6bn into emerging markets equity ETFs.
Fixed-income ETPs saw net inflows of $1.5bn, of which $0.9bn went into high yield products and $0.7bn into corporate bond offerings.
Commodity ETPS saw inflows of $1.1bn of which $1.2bn went into precious metals products, while broad commodity exposure saw net outflows of $0.2bn.
- Fin24.com
* The writer holds ETFs in Satrix RAFI, Absa Capital ERAFI and Nedbank Capital BettaBeta QWT 40.
