Buying one ETF that lets you invest in as many companies as possible- across both emerging and developed markets- spreads your risk while allowing you to capitalise on growth in different regions.
If you’re new to this community, you can find out why we favour this strategy by listening to the discussion and read the related post. You can also watch the Lars Kroijer video series that informed this strategy.
The Ashburton 1200 is the only JSE-listed ETF weighted by market capitalisation that offers exposure to both developed economies and emerging markets. For that reason it has been our recommended buy, both within a tax-free investment account and in the discretionary space.
The ETF’s emerging market exposure is what caught our interest. Smaller economies have more scope for growth by increasing gross domestic product (GDP) and increasing the spending power of its citizens. However, since small economies tend to be less stable, they contribute to the risk in your portfolio.
The goal is to strike a balance to capitalise on the growth of these regions without getting seasick from the yo-yo effect. The Ashburton 1200 does that by limiting the emerging market exposure to around 7%. It might not seem like much, but since South Africa is also an emerging market, any assets held locally- including retirement funds, cash savings and investment properties- are automatically emerging market assets.
There are a number of so-called “global” ETFs listed on the JSE, but these invest only in developed market economies. As our friend Stealthy Wealth argues, huge corporations like Apple and Amazon sell their products all over the world. As developing economies flourish, so will these companies. However, should those companies decide to exit emerging economies or become subject to regulations that prohibit them from doing business in the developing world, investors will lose out on the earning potential of these economies. It also limits exposure to certain sectors, notably technology, which might not be the growth area for those economies.
The CoreShares S&P Global Dividend Aristocrats ETF (GLODIV) offers a similar amount of emerging market exposure. However, since this is a smart beta ETF, its weightings aren’t as straightforward as the Ashburton product. As with the Ashburton 1200, the emerging market exposure from this ETF comes from the Pan Asia region. Companies from the United States and Canada are given equal weight in the ETF. The ETF’s dividend-centricity is reflected in the fact that companies from Europe and the Pan Asia region are weighted by dividend yield.
As we discussed in this analysis of the GLODIV, the dividend aristocrat methodology uses dividend payments as a way to find quality companies. The reasoning is companies that pay a dividend consistently over a period of consecutive years can earn money – whatever the weather. In the developed markets, this can be an exclusive club to join. Developed market constituents are only included in the ETF if they’ve paid dividends for 25 consecutive years. While the price of entry is significantly lower for emerging economies, simply being listed is not enough to qualify a company for inclusion. As a result, GLODIV only has 304 constituents.
These exclude some of the biggest companies in the world – notably the so-called FANG (Facebook, Amazon, Netflix, Google) stocks. In fact, while over 15% of the 1200 shares in the Ashburton ETF are technology companies, it only represents 4.3% of the CoreShares ETF. Instead, the CoreShares offering has nearly 20% invested in consumer staples – the things we tend to buy regardless of how the economy is behaving.
The difference in exposure is significant. While the Ashburton 1200 reflects what’s going on in the world economy at the moment, the CoreShares Global Dividend Aristocrats offers a more predictable ride, even with higher exposure to individual companies. Your choice of ETF will depend on your tolerance for risk.