Note: This ETF name changed to CoreShares Equal Weight Top40 on 9May. JSE code: CSEW40
Welcome to the first edition of our new weekly ETF blog. Each week we will tackle an ETF available through South African stockbrokers. We’ll discuss the index tracked by the ETF and speak to experts about the benefits and limitations of each ETF to help you figure out which ETFs fit in with your financial plan. We kick off the series with the CSEW40 ETF.
You might have heard people talk about the JSE Top40. This index is made up of the 40 largest stocks on the JSE. It is the largest index in South Africa and various ETF products track this index, including the CSEW40.
TIP: Not sure what an ETF has to do with an index? We explain that here.
While the CSEW40 ETF also tracks the 40 biggest shares on the JSE, it differs from other Top40 ETFs in how much each company is represented in the ETF. Normally, a company that is worth more takes up more space in the ETF. The company’s representation in the ETF is based on the value of the company, often called market capitalisation. In the CSEW40 ETF, however, each of the 40 shares only takes up 2.5% of the ETF.
For example, both the equally-weighted and other Top40 ETFs have Naspers and Richemont. In ETFs that use market capitalisation, those two shares make up almost 25% of the ETF. If you invest R100, R25 will be put towards Naspers and Richemont, only leaving R75 for the other 38 shares! When those two companies do well, it’s great because your R25 becomes worth more. However, if those companies don’t do well, they can do serious damage to your R100 investment.
By making sure that each company can only take up 2.5% of the ETF, your R100 is split equally across all 40 companies, reducing risk.
TIP: We explain why having money in different companies reduces risk here.
It also means you benefit when smaller companies like Capitec and Woolies do well, because they also represent 2.5% of the ETF. This means your ETF also does well when the smaller companies do well.
Weekly expert: Warren Ingram
Every week we ask an independent expert to explain what differentiates the featured ETF from all others, what limitations to be aware of and what type of portfolio would most benefit from holding the featured ETF. This week, Warren Ingram from Galileo Capital delves deeper into the CSEW40.
What differentiates the CSEW40 ETF?
“The CSEW40 is a great hybrid between a normal (pure) index tracking ETF and a more active ETF such as a RAFI or DIVI investment that has an element of decision-making that can impact the investment positively or negatively. The most valid criticism of index tracking investments is that one or two shares could become so large in your investment that you effectively have no diversification. If you try to address that issue, you need to do so without trying to predict what investments will do well. The CSEW40 strikes a great balance because you get the same shares as a normal Top40 but each share gets the same allocation. This means the costs of the ETF can be limited and there are no “active” decisions that might harm your performance. I also like the fact that you get a larger than normal allocation to the smallest companies in the Top40.”
What limitations should investors be aware of?
“You will miss out on a sustained run in share price of a company because your allocation will always be limited to 2.5%. While this limits some of the upside it means that your money is naturally being reallocated from more expensive shares to better priced ones. The real benefit is proper diversification across 40 shares.”
What type of portfolio would benefit from this holding?
“I think it is ideal for any investor looking for long term capital growth who wants protection from the possibility of a company “blowing up” in your portfolio. You might sacrifice a bit of potential capital growth but your potential downside is more limited than a normal Top40.”
|ETF name||CoreShares Equal Weight Top40 ETF|
|ETF JSE code||CSEW40|
|Issue date||25 March 2010|
|ETF benchmark||BettaBeta Equally Weighted Top40 Index. Each Top40 stock is 2.5% of the ETF.|
|ETF major holdings||Brait, Tiger Brands, Capco, Nedbank, Discovery, MMI, Shoprite, Barclays Africa, Remgro, Standard Bank|
|Market cap*||R423 million|
|Performance (excluding dividends)*||1 year -9.8%
3 year +5.5%
5 year +37.5%
|Dividends||Paid quarterly (Mar, Jun, Sep & Dec)
Last 12 month dividend yield = 2.39%*
|What we like||Equal weight reduces concentration of a few large cap stocks giving each stock equal importance in the ETF.|
* As at close 1 February 2016
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