It goes without saying that not all Top 40 exchange traded funds (ETFs) are alike. You need to consider what you expect from them before you include them in your portfolio. As with unit trusts, ETF managers use the Top-40 benchmark for their standard products, but not all are created equal.
For example, if you’re a cautious investor and you don’t want to be exposed to short-term volatility, such as exchange rate and commodity price fluctuations, then the Satrix SWIX Top 40 and BettaBeta QWT 40 are probably better options than Satrix 40 and BIPS 40, which will give you access to the commodity cycle. Satrix 40 and BIPS 40 also provide good rand hedge exposure.
How do ETFs differ?
The Satrix Top 40 and BIPS Top 40 track the market capitalisation-weighted Top-40 index, which gives priority to the major companies on the JSE. These dominate the market cap league — Anglo and BHP Billiton, the biggest two companies, make up 26,3% of the Top 40 portfolio. The next four largest companies provide 25,7% of the weighting of the Top-40 index. So six out of 41 companies make up 52% of the Top 40. As you can see, you’re investing in a large cap fund, which will reflect growth and momentum in the market cycle. The mining and resource sectors play a large role, making up 48,8% of the index.
The Satrix SWIX Top 40 tracks the Shareholder Adjusted Top-40 index, which only takes into account shares in the Top 40 that are held in the domestic JSE register. Top 40 companies that are held abroad and traded through London or New York, for example, are not part of the SWIX. Therefore the SWIX reduces exposure to mining and resource shares (36,6% only) as foreigners tend to be the largest shareholders in those sections. This reduces fund allocation to the larger companies. The biggest six companies on the SWIX contribute only 41,5% of the index, reducing the large cap bias.
The BettaBeta QWT 40 balances the equity portfolio still further, allocating funds on an equally weighted basis (2,5% per share) to all stocks in the Top 40. In this way, the product reduces short-term volatility, exposes you to smaller companies, diversifies the portfolio and reduces the size and resource bias of the Top 40.
According to Mike Brown, managing director of etfSA, the lower risk coming with the SWIX and BettaBeta has paid off in better annual and risk-adjusted returns — this is over a seven-year period.
The Satrix 40 has an annualised total expense ratio (TER) of 0,463% (46,3 basis points), whereas the TER for the BIPS 40 is 0,21% (21,1 bps).
The Satrix SWIX Top 40 ETF has an annualised total expense ratio of 0,464% (46,4 bps).
The BIPS Top 40, which has a total expense ratio (TER) of 0,21% a year, is one of the lowest-cost products of all the equity exposure CIS products that retail investors can choose.
The BettaBeta QWT 40 has only been listed since March 2010, but is expected to have an annualised TER of under 0,5%.
Next week, Smart Money will look at the RAFI index which selects shares based on relative valuations and the Divi index which selects shares based on dividend yields.
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