Wise up on offshore ETFs

When it comes to offshore investing, many South African retail investors have adopted a very blinkered approach to Exchange Traded Funds (ETFs).

ETFs are without a doubt one of the best tools for retail investors to gain access to international markets, but many local retail investors are simply looking at the JSE-listed options and are not aware that these aren’t the only options available.

The Deutsche Bank ETFs are the best known of the locally-listed options:

ETF	1 year performance (per annum)	3 year performance (per annum)	5 year performance (per annum)	Assets Under Management
DBX Tracker MSCI Eurostoxx 50	-12.48%	2.80%	16.,01%	R1.7bn
DBX Tracker MSCI FTSE 100	-15.10%	3.74%	14.37%	R967m
DBX Tracker MSCI USA	-3.98%	17.55%	25.67%	R4.45bn
DBX Tracker MSCI Japan	-9.04%	11.20%	19.15%	R494m
DBX Tracker MSCI World	-6.96%	12.96%	21.88%	R3.65bn

Deutsche Bank has also listed a couple of Exchange Traded Notes (ETNs) giving access to smaller, niche markets, but our preference is for ETFs which offer a lower degree of risk.

Now let’s look at what is arguably South Africa’s best known ETF, Satrix40:

ETF	1 year performance	3 year performance	5 year performance	Assets Under Management
Satrix40	-2.55%	4.43%	10.60%	R6.49bn
SatrixRAFI	17.71%	4.20%	10.13%	R246m

 

It’s clear that offshore has been a far better place for South Africans and yet if one considers this: According to ETFSA.co.za, the local market for Exchange Traded Products (ETPs) – which comprise ETFs and ETNs plus index tracking products – has a total market capitalisation of just over R74 billion. The major offshore ETFs represent less than 16% of total ETF assets.

Bearing in mind that the majority of South African investors are forced to invest in the JSE Top40/Top50 for their retirement annuities, this can have a major impact on your long-term savings goal.

Where to next?

There is no question that the US trade – effectively backing the S&P500 – has been a very profitable investment over the last five years. However, the arrival of a Trump presidency, the fallout from “Brexit”, an anticipated reduction in quantitative easing and the possible start of a rising interest rate cycle, means that investors will need to become much more focused on picking growth regions.

Without endorsing these selections, there are expectations that the likes of Argentina, Russia and Mexico are likely to perform really well in the coming years:

• Argentina is a firm favourite for Morgan Stanley, which is estimating the market could rise as much as 258% in the next five years.
• Russia and Mexico were popular with a variety of market commentators who have bullish expectations on 2017/2018?

Here is the challenge for South African retail investors trying to access any of these three markets: The tools they have at their disposal, don’t give you access to these markets. Let’s look at the Top10 constituents of the DBX World ETF:

Company	Country	Percentage
Apple	US	1.80%
Microsoft	US	1.36%
Exxon Mobil	US	1.11%
Johnson & Johnson	US	0.93%
Amazon.com	US	0.91%
JP Morgan	US	0.90%
General Electric	US	0.84%
Facebook	US	0.81%
Wells Fargo	US	0.79%
AT&T	US	0.75%

In fact 60% of the DBX World ETF is US exposure, 9% is Japan, 7% is the United Kingdom, 4% is Canada and then 3% each for Australia, Germany, Switzerland, France and Canada.

Many South Africans are not aware, but they can actually invest in ETFs in these potential growth regions, for as little as $1 000 (R13 000). Let’s look at the three options:

ETF	Approximate Price to Earnings Ratio (Average)	Approximate dividend yield	1 year performance	3 year performance	5 year performance
iShares MSCI Russia Capped	7.83	4.45%	53.95%	-4.32%	-0.74%
iShares MSCI Mexico Capped	24.73	0.85%	-10.11%	-11.54%	-2.33%
Global X MSCI Argentina	24.42	0.36%	54.18%	49.49%	10.23%

Now we are certainly not recommending that investors bet the farm on these regions – far from it – but what it does highlight is that investors have the option of targeting specific markets to improve their investment returns.

South African investors have a limited investment universe when it comes to mainstream retirement products. Every month, hundreds of millions of rands are being poured into the JSE Top40 through retirement savings and managed pensions. If the JSE Top40 hasn’t beaten inflation over the past three years, what is the opportunity cost of keeping more than 80% of your assets in this index? That being said, keep in mind that should the rand appreciate, your offshore investment will directly be affected by it’s performance?

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