ETF: Understanding the Ashburton MidCap ETF

In ETF Blog, Latest by Kristia van Heerden

A stock market crisis is an excellent time to see how different investments and asset classes behave under pressure. COVID fears caused a global market wobble back in March from which there was no place to hide. Local and global shares and bonds all took a knock and many have yet to recover. Local investors holding offshore ETFs were somewhat protected by the currency blow-out that also followed. Who ever suspected we’d be glad for a weak rand?

Since many of the companies in our best-known index, the Top 40, earn their income outside of South Africa, the FTSE/JSE MidCap Index, tracked by the Ashburton MidCap ETF, offers an excellent opportunity to see what happens to more South-Africa-centric companies during a financial crisis.

Tip: Still unclear about what an index is or what it has to do with an ETF? We explain everything here.

What is the Ashburton MidCap ETF?

If the biggest companies listed on our exchange are included in the Top 40 index, you can think of the MidCap index as the little sister of the Top 40. The companies in this index aren’t as large or traded as often. The MidCap index aims to represent at least 85% of the market outside of the Top 40. Because its methodology is not to track a set number of companies, the number of constituents in this index will vary over time. When companies fall out of the Top 40, they fall into the MidCap index. Similarly, the biggest holding in the MidCap index is the Crown Princess of the Top 40. It’s just waiting for its moment in the sun.

Weighted by market capitalisation, it stands to reason the company most likely to move into the big leagues by joining the Top 40 would also be the biggest holding of the MidCap ETF. A big market event that severely affects the market capitalisation of our largest companies can easily trigger a change in the constituent makeup of the MidCap index, by catching the falling star and losing the rising star. This isn’t always a bad thing. If the falling star is only temporarily struggling, the MidCap ETF could benefit from its recovery before losing it to the Top 40 and catching the next one. That said, a huge company can cause a lot of drag on its way down.

On the other end of the index are companies too small to pay attention to in their individual capacity. The great thing about starting small is a lot of room for potential growth. In that regard, the MidCap offers an opportunity to capitalise on the growth of South Africa’s next superstar from the moment it starts gaining traction until it makes its way into the Top 40.

The last quarterly rebalancing of the Ashburton MidCap happened three months after the market crash. In that time, Northam Platinum went from 3.99% to 4.33% of the ETF and sits at 6.06% of the index at the time of writing. With the run on gold we’ve experienced since the crash, it’s not surprising that Harmony Gold Mining got up-weighted from 2.57% to 3.06%.  Even though the economic turmoil didn’t result in any of the constituents losing its place in the index or a Top 40 stock joining the index, the performance of this ETF since the beginning of the year paints a clear picture of the economic realities of SA Inc. The 30.6% drop in this index in 2020 (so far) makes perfect sense considering the makeup of the constituents. South African stalwarts like Clicks, Dischem, PicknPay, Spar, Truworths and Woolworths are all represented here.

We feel the pain in our economy in many ways. However, with some economic activity returning following our extended lockdowns and the MidCap starting from such a low base, there might be an opportunity for a bold investor with sea legs.

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ETF name Ashburton MidCap ETF
ETF issuer Ashburton
Issue date 15 August 2012
Total investment cost 0.71%
ETF Benchmark  FTSE/JSE MidCap index
Tax-free savings account Investment allowed
ETF major holdings See the full list here.
Market cap R327m
Performance 1 year -18.9%
Performance 3 years -22.0%
Performance 5 years -11.9%
Dividend yield 2.5%

*September 2020