Several new exchange traded funds (ETFs) have recently been added, or will soon be added, to the range of these investments available to South Africans, among them three so-called “smart-beta” funds.
ETFs are collective investments that, unlike unit trust funds, are traded on the JSE, hence their name. An ETF tracks a market index by holding the assets represented in the index in the same proportions, thus delivering the performance of the index, known as “beta”.
Smart-beta funds track indices designed to mitigate risk and enhance performance, and some of these indices mimic the styles of active fund managers, who focus on shares that exhibit certain characteristics. For example, value managers seek out shares that offer good value – in other words, the shares are selling at a price lower than their inherent value.
NewFunds, a wholly owned subsidiary of Absa that specialises in ETFs, is launching two new ETFs this week that, along with a third, make up its SA Equity Premia Range.
From a universe of the 60 most actively traded shares on the JSE, each ETF holds shares that exhibit a certain characteristic or “factor”, according to a custom-made index. The three ETFs are:
• NewFunds Equity Momentum ETF: holds the 20 shares that have exhibited the greatest price appreciation over the past 12 months (excluding the most recent month);
• NewFunds Equity Low Volatility ETF: holds the 20 shares that exhibit the lowest volatility and are the least likely to respond to extreme market movements; and
• NewFunds Equity Value ETF: holds the 30 stocks that represent the best value, with the lowest price-to-earnings and price-to-book ratios.
These three factors – momentum, volatility and value – have been shown over the long term to provide better performance than the market as a whole, at lower risk (see graph). Each factor goes through cycles of outperformance and under-performance, and the cycles of the different factors tend to be uncorrelated. Thus, says Absa, “adding them into portfolios that are well diversified should provide investors with returns in excess of the market over the long term.”