ETF: Understanding the CoreShares Top 50 ETF

A while ago I got very excited about holding companies in ETFs. Listed companies often own big chunks of other listed companies. For example, Remgro owns shares in Mediclinic and RMB. When you buy an ETF that invests in Remgro, you are also getting exposure to the companies in which Remgro owns shares. If the ETF also invests in the companies partially owned by Remgro, you are exposed to the same company twice. That’s great if the underlying company does well, but not ideal if the company’s share price takes a hit.

As the name implies, the CoreShares Top50 ETF invests in the 50 biggest companies in the country. What makes this ETF interesting, however, is that it adjusts its weightings so you aren’t exposed to the same companies twice through holding companies. The shares owned by the holding company is deducted from the available shares of the company it owns. This is called “float-adjusted market capitalisation”. The ETF invests a larger percentage in bigger companies, but limits each company to only 10% of the ETF.

TIP: CoreShares’ Gareth Stobie spoke to Simon about the ETF when it launched. He explains the methodology here.

Weekly expert: Craig Gradidge

What sets this ETF apart from other ETFs in the market?

The Coreshares Top50 tracks the S&P South Africa 50 Index by buying constituent securities in the same weightings in which they are included in the Index. According to CoreShares, when the popular FTSE/JSE Top 40 Index was created the market was best represented by the top 40 companies. With the subsequent growth in the market and improved liquidity, S&P took the view that the top 50 companies is a more thorough representation of the market. The Index is constructed and maintained by S&P Dow Jones Indices, and provides exposure to the 50 biggest companies on the JSE by float-adjusted market cap. Constituent weightings are capped at 10%.

This seems to be a blend of traditional index tracking and smart beta. The tradition comes in the form of a market cap weighted tracking of an equity index. The smart beta bit comes in the form of a bespoke index, tracking the top 50 instead of the top 40, with a capping of the exposure to any security at 10%. The traditional aspect of the CT50 will dominate in terms of performance so expect a high correlation with local equities.

It is an equity tracker with exposure to listed property shares such Resilient, Growthpoint and Redefine. There aren’t many standout features which should not be an issue if local equity exposure is what you need in your portfolio.

What limitations should investors be aware of?

This is primarily an equity investment with little by way of asset class diversification. There is limited scope for risk management in the form of broad diversification. The capping will likely only affect large shares, which should not be a major issue. Given that there are 50 securities in this ETF, strong performance by the majority of the holdings (essentially those shares outside the top 10) is unlikely to have a material impact on the overall performance of the ETF. Finally, there is no bespoke offshore exposure, although investors are exposed indirectly via the likes of Naspers and Richemont.

Tip: Read about international exposure on the South African market here.

What type of portfolio would benefit the most from holding this ETF?

This ETF is suitable for a long term growth-oriented portfolio. The CT50 is for the investor seeking above-inflation returns over time and is comfortable with short-term volatility. It would make a good core holding for the investor adopting a core-satellite approach. The investor will benefit from broad equity exposure, cheap pricing, high transparency, and liquidity. The ETF is priced at 0.20% p.a. which is significantly cheaper than 1 – 1.5% charged by many unit trust equity funds.

Unpacking the CoreShares Top50 ETF

ETF name	CoreShares Top50
JSE code	CTOP50
ETF issuer	CoreShares
Issue date	13 May 2015
TER*	0.26%
ETF benchmark	S&P South Africa 50 Index
Tax-free savings account	Investment allowed
ETF major holdings	BHP Billiton, Richemont, Naspers, Anglo American, Sasol, First Rand, Standard Bank, British American Tobacco, MTN, SanlamView the full list here.
Market cap*	R1.03bn
Performance	1 year -11% 3 year +3.2%
Dividends*	3.7%
What we like	This ETF ensures you get access to all the biggest companies in the country, but protects you from double exposure through holding companies. It also limits your exposure to a single company to 10%.