The universe of funds that is open to investors choosing low-cost index-tracking investments is slowly growing wider and “smarter” as the local passive investment market matures.

The number of exchange traded products (ETPs) – including exchange traded funds (ETFs) – had grown to 70 by the end of last year, according to the latest survey by online ETP platform etfSA. However, the choice of broad-based equity index tracking and multi-asset passive unit trust funds and ETFs, which are probably the most suitable for you as an individual, has remained limited.

Many local equity index-tracking funds targeted at individual investors track all the shares on the JSE as represented by the JSE/ FTSE All Share Index (Alsi) or the 40 largest shares on the JSE as represented by the JSE/FTSE Top 40 Index or the Shareholder Weighted Top 40 (or Swix) index. But local investors have also had access to a small range of so-called “smart beta” funds, which aim to enhance the returns of these indices.

Beta refers to the returns you can earn from the market without the intervention of a fund manager. A smart beta fund typically tilts the selection of securities available in the market to a theme or style, such as targeting shares that pay good dividends.

Current smart beta offerings target shares within the Alsi or Top 40 that:

* Pay higher dividends, by tracking the FTSE/JSE Dividend Plus Index (Satrix Divi Plus and Sygnia Div Index funds);

* Invest heavily in undervalued shares by tracking the Research Affiliates Fundamental Index (Rafi) (various funds offered by Grindrod, Old Mutual, NewFunds and Satrix);

* Equally weight shares in an index, rather than weighting the shares according the market capitalisation, for example. This avoids concentration in a few expensive shares (Nedbank BettaBeta Equally Weighted Top 40);

* Take advantage of shares that have upward momentum (NewFunds Equity Momentum Fund and Satrix Momentum Index Fund);

* Invest in Shariah-compliant shares (NewFunds Shariah Top 40);

* Invest in shares that rate well on environmental factors (Nedbank BettaBeta Green).

* Invest more heavily in funds with a good empowerment status (NewFunds NewSA).

Index-tracking funds that offer South African investors exposure to offshore markets have largely been based on the Morgan Stanley Capital indices, with Deutsche Bank x-trackers offering five index funds that track the global market and four major foreign markets (the United States, Europe, Japan and Asia) and Old Mutual offering a unit trust fund that tracks the global market using the Rafi methodology.

Exchange traded notes (ETNs), that track offshore markets such as China and Africa are offered by Standard Bank, Deutsche Bank and BNP Paribas. ETNs are slightly more risky than ETFs.

A multi-asset fund should probably be your first choice, to offset the risk of being in a single asset class. However, the choice of index-tracking multi-asset funds remains narrow, with only Satrix, Sygnia and Mapps offering them. In contrast, a high number of actively managed multi-asset funds are available.

But now the passive market is broadening, particularly with the launch over the past year of indices by the largest global index provider Standard & Poors (S&P) Dow Jones Indices. These have spawned, or are likely to spawn in the near future, new index-tracking funds, including funds based on multiple smart beta indices.

A year ago, S&P expanded its equity indices to track the South African equity market by launching the S&P South Africa Composite Index and one that tracks the top 50 – as opposed to the top 40 – shares on the JSE, the S&P South Africa 50. It also launched a Shariah index and a number of African indices.

One of S&P’s African indices is tracked by a Satrix fund.

Zack Bezuidenhout, the head of South Africa and sub-Saharan Africa at S&P Dow Jones Indices, says Grindrod is expected to launch an ETF that tracks its S&P South Africa 50 Index shortly.

But an interesting development is S&P’s launch over the past year of the following smart beta indices:

* The S&P South Africa 50 Equal Weight Index, which could result in funds that offer an alternative to the existing equally weighted funds;

* The S&P South Africa Dividend Aristocrats, which offers an alternative to the JSE/FTSE Dividend Plus Index and has already resulted in the Grindrod Bank Dividend Aristocrats ETF;

* The S&P South Africa Low Volatility Index, which is being tracked by the Grindrod Bank Low Volatility ETF.

* The S&P Momentum South Africa Index. Bezuidenhout says a new momentum unit trust is expected to be launched next year.

* Most recently, the S&P Quality SA Index, which will be tracked by a Satrix fund that is currently seeking registration with the Financial Services Board.

* The S&P Global Intrinsic Value Index (Givi), which selects low-volatility shares on typical value-style criteria – a low price relative to expected earnings.

The smart beta indices not only spawn low-cost investments that can offer you different returns to those you can currently access through passive investments, but provide more accurate benchmarks for existing actively managed funds. This can help you to identify whether an active fund is indeed worth the fee you pay its manager.

According to Bezuidenhout, back-testing of the performance of the indices show that no active or passive funds in the South African general equity or large cap sub-categories were able to beat the returns of the low volatility, quality and momentum indices over three and five years (go to link for S&P performance tables, and see “Smart index performance”, below).

S&P’s smart beta indices are said to harness “factors” in the market that can deliver returns in excess of those delivered by the market as a whole. If an index can harness a factor, it can offer a low-cost alternative to an active manager who follows that investment style.

Good news for investors seeking exposure to offshore markets is that S&P says it expects a local provider to launch an ETF tracking its S&P500 Index, which tracks 500 shares listed in the US that make up half of the global equity market.

Exposure to offshore markets through foreign currency-denominated index-tracking funds through linked investment service providers are also limited.

The offshore index funds available to you are likely to expand significantly later this year when the world’s largest asset manager, BlackRock, which includes ETF provider iShares, registers funds for South African investors.


* S&P Low Volatility Index

The index, which selects 40 shares from across the equity market that had the lowest volatility over the past year and are freely tradable or liquid, has out-performed the S&P’s Composite Index (for the entire local equity market) by 7.06 percentage points a year, on average, over five years to December 31, 2014. The index includes a number of property stocks, which explains its recent out-performance, and it could lag the all-market index when the market is rising fast.

* S&P Quality Index

This index chooses shares that score in the top 20 percent of all shares on the JSE on measures of:

– Profitability, such as the return on equity, return on assets and gross profit;

– The quality of earnings with respect to the strength of the company, and taking into account the persistency of the earnings; and

– The financial robustness of the company, as determined by the strength of its balance sheet.

The index out-performed the S&P Composite Index by 9.35 percentage points a year over five years to the end of December last year.

* S&P Dividend Aristocrats Index

In this index, shares are chosen on the basis that they have increased or maintained stable dividends for at least five years. The shares, which do not include property shares, are equally weighted. It differs from the FTSE/JSE Dividend Index, which includes shares with the best dividends on a one-year forecast dividend yield (the dividends expected over the coming year as a percentage of the share price).

The index out-performed the S&P SA Composite Index by 5.57 percentage points a year, on average, over five years to the end of December, and also out-performed the FTSE/JSE Dividend Index quite substantially.

* S&P Momentum Index

The momentum index selects shares that have had the greatest upward change in price over the past year. The index aims to benefit from shares whose prices are rising and may continue to do so as a result of investors jumping on the bandwagon.

This index is expected to out-perform when the share market is trending up and will perform well when the value and low volatility indices are under-performing. It also out-performed the S&P SA Composite Index by 11.31 percentage points on average a year over the past five years.

* S&P Global Intrinsic Value Index

The shares in the S&P Givi are chosen from the S&P SA Composite, and this index out-performed the S&P SA Composite Index by 4.64 percentage points on average a year over the past five years.

Remember: Past performance is no guarantee of future performance, especially when markets are regarded as expensive, which they currently are.


Nedbank’s two exchange traded funds (ETFs) are likely to move |to Grindrod Bank’s ETF management company, Grindrod Index Tracker Managers (GTrax), GTrax has announced.

Nedbank Capital and GTrax are seeking regulatory approval and will ballot unit holders of the two ETFs, which are collective investment schemes, to obtain approval to amalgamate their collective investment schemes.

Nedbank Capital’s two ETFs were marketed under the Nedbank Beta Solutions label. One equally weights the shares in the FTSE JSE Top 40 Index (the Nedbank BettaBeta Equally Weighted Top 40 ETF) and the other focuses on shares that rate well on environmental factors (the Nedbank BettaBeta Green ETF).

If the necessary approvals are obtained, the Nedbank ETFs will be rebranded as GTrax and will join a growing suite of five ETFs offered by GTrax. GTrax says the investment objectives and cost structures will remain unchanged.

“This transaction is one of the steps Grindrod Bank is taking to grow its low-cost, passive investment offering,” Gareth Stobie, head of capital markets at Grindrod Bank, says.

GTrax currently manages five ETFs, spanning listed property, preference shares and general equity.

“ETFs have proved to be an excellent mechanism to build wealth and save over time. The global ETF market had another record year in 2014 in terms of cash inflows and we would like to mirror this trend in South Africa,” Stobie says.

John Chemaly, the executive head of global markets at Nedbank Capital, says the ETFs were found wanting in a review of shareholder value and the efficient use of Nedbank’s resources.

Nedbank Capital should not be confused with Nedgroup Investments, a separate business within the Nedbank group focused largely on actively managed funds. These are outsourced to managers Nedgroup Investments identifies as “best of breed”.

Nedgroup Investments also offers two “core” index-tracking funds.

Article credit: