Patrick Cairns
3 minute read
5 Apr 2014
6:00 am

SA’s most innovative ETFs

Patrick Cairns

Investors have a smorgasbord of Exchange Traded Funds (ETFs) to choose from nowadays that provide flexibility, range and innovation, impossible in the days of the first ETF: the Satrix 40.

Image courtesy stock.xchnge (bizior)

That was the quintessential index tracker exposed to the primary equity market index, the FTSE/JSE Top 40.

Now ETFs offer low-cost passive tools with many of the be-nefits usually associated with active management – a market view or asset allocation that gives you more than a “vanilla” exposure.

The Satrix Divi tracks the FTSE/JSE Africa Dividend Plus index, which ranks the top 30 companies from the large and mid-cap sectors of the JSE purely on their forecasted dividend yield.

A second fund will come to market on April 14: the Grindrod DiviTrax will follow the S&P South Africa Dividend Aristocrats Index, which only includes those counters that enjoy average daily trade of at least R5 million, and have increased or maintained their dividend for five years running.

There is no maximum basket size, although there is a minimum of 20.

This does not just chase the highest dividend yield; it has a higher concern given to the quality of the shares in the index.

RAFI

Research Affiliates Fundamental Indexing (RAFI) products were the next big innovation. The Satrix RAFI 40 tracks the FTSE/JSE RAFI 40 Index.

The RAFI methodology measures and ranks based on four fundamentals: cash flow, book value, sales and dividends. The 40 companies that come out on top are included in the RAFI 40 index.

The RAFI methodology has also been extended through the NewFunds range to offer industry specific funds – eRafi Indi, eRafi Fini and eRafi Resi – as well as a broader fund, the eRafi Overall.

Multi-asset ETFs

The first, and still only, multi-asset ETFs in South Africa are the NewFunds MAPPS Growth and NewFunds MAPPS Protect. They provide investors with a low-cost entry into asset allocation by investing in composite indices that are made up of equities, bonds and cash.

The MAPPS Growth Index is the higher risk of the two, with an equity component of around 75%, with the MAPPS Protect Index having an equity component in the region of 40%. You can buy a single listed security that gives access to more than one asset class.

Social responsibility

This is growing in acceptance, but in South Africa the universe of socially responsible ETFs is limited to two: The Nedbank BettaBeta Green Fund and the NewFunds NewSA Fund.

The former selects and weights companies based on the Carbon Disclosure Project and the Clean Development Mechanism.

For its part, the NewSA Fund re-weights the shares in the FTSE/JSE Top 40 based on their empo-werment ratings. This supports companies with better BEE credentials.

Volatility

South Africa’s first ETF to follow this strategy will be launched later this month: the Grindrod LowVol Trax.

The fund will track the S&P South Africa Low Volatility Index, which includes the 40 least volatile stocks over the prior 252 days. Stocks must have a minimum three-day average trade value of R10 million to be eligible.

Such funds provide a smoother return and less balance sheet volatility. Low volatility strategies are likely to under-perform over the long term, but they offer better protection in down markets, ideal for shorter-term portfolios.