ETF: CSEW40 - your vote factors

On Monday CoreShares announced its intent to change the methodology and name of the CoreShares Equal-Weighted Top 40 (CSEW40). Holders of the CSWE40 will be given an opportunity to vote for or against the changes through their stockbrokers until 1 April. Should the changes be approved by 25% of CSEW40 shareholders, the new methodology and name will take effect on 8 May 2019.

One factor to six

So-called smart beta indices are designed to outperform those weighted by market capitalisation. The CSEW40 in its current form ensures that each top 40 company represents 2.5% of the index, as opposed to giving higher weightings to bigger companies. This reduces risk by limiting exposure to a single share and allows investors to capitalise on the success of smaller companies.

When big companies reach maturity and growth slows down, smaller companies that continue to grow can be a great addition to a portfolio. However, big companies aren’t always mature companies. In the past five years, the limited growth of the South African market has been fuelled by the success of a few behemoths, while smaller companies struggled to do well in challenging conditions. As a result, the capitalisation-weighted Top 40 index returned 14.2%, excluding dividends, over the past five years, while the CSEW40 had a negative return of 4.7%.

When markets are down, investors jump ship. This is even more true when an investor’s portfolio can’t keep up with the performance of the market. In addition to size, CoreShares hopes the introduction of four more factors will create a smoother investment ride with more opportunities to outperform the market. In addition to size, the index will now include the following factor filters:

Value
Momentum
Quality
Low volatility

In addition to these filters, new diversification methodologies will also be implemented. As explained by CoreShares’ head of product and client solutions, Chris Rule:

“Currently there are four share weighting schemes used. Each of the below weighting schemes are given equal weighting. In a similar way of diversifying factor returns, there is also an opportunity to diversify weighting schemes.”

Equal Weighting
Risk Parity: Equal weighting of risk, not nominal values of shares
Maximum decorrelation: exploits the relationships between shares, in particular those with low correlations
Maximum Sharpe Ratio: a way to attempt to maximize risk adjusted return

Click here to download a brochure on the proposed changes to the ETF. Click here to find out more about the ballot voting procedure.