ETF: Time travel on the JSE

In ETF Blog, Latest by Kristia van Heerden

Checking local investments at the moment is a surefire way to experience instant regret. The weak currency is propping up our offshore investments, but those of us holding JSE-listed companies and ETFs are feeling the pain of short-term market movements in a real way. 

If, like me, your portfolio fell into a 20% hole overnight, you might not believe there’s a silver lining to be found in this situation. Luckily we have some good news.

A market drop is like time travel

Markets tend to go up over time, even with these wild see-saw movements in between. That’s why investments aren’t for the short term. They also need time because companies sometimes share their profits, which gets paid out to us in the form of dividends. When we reinvest these dividends, we hold more shares, which make us more money.

When the market drops in a big way like it has over the past three months, we get to make up for lost time. Not only does the price of a single unit of Top 40 go back to days of yore, if the market drops enough it even strips out all of the dividend benefits we received. 

If you had to buy the Top 40 at its current levels, you would be travelling back in time by four years. The last time we traded at current levels was in 2016. This is scary for us in 2020, but great news for those of us who get to time travel. We not only get to make up for lost time, we also get a taste of what we can expect in the future. Have a look at the picture below to see what we mean.

ETFs protect you more than you think

On 9 March the Sasol share price fell 46.56% in just one day. Since this company is one of 40 companies in the Top 40 index and only represented 1.6% of the index at the last re-weighting, the Top 40 only fell by 6.6% on the same day. The entire market is having a hard time at the moment, so that movement is not only caused by Sasol. 

Since January this year, the Top 40 index has fallen 15%. Nobody thinks this is fun, but it’s much less painful than watching half the value of an investment being destroyed overnight. 

ETFs kick out the dogs

Since the Top 40 ETF also holds Sasol, Top 40 ETF holders are also Sasol shareholders. However, unlike Sasol shareholders, we don’t have to sell at a loss to get rid of the share. If the share price continues to fall, Sasol will eventually be booted out of the Top 40 index. This will happen when the index is re-weighted. The Sasol share will be replaced with the next biggest share on the list and life will carry on as usual. 

In this article we explain exactly how this works using Steinhoff as an example.

Remember, you only realise a profit or loss in an investment when you sell the shares. Your portfolio will have many green and red days throughout your investment career. You can’t control how many of each you’ll have, but you can control whether you want to sell your investment on a green day or a red day.

Of course, Sasol shareholders can also hold on to those shares and hope for some green days in the future. Sadly, their success depends on the ability of a single company to recover, which could take many years or might not happen at all. By then we may have forgotten that Sasol hurt us once.

What should I do?

If you hold a Top 40 investment at the moment and you don’t have spare cash lying around, it’s best to look away. Remember, if you sell on a red day, you lose money. You need to wait for green days to return before getting rid of investments.

If you are trying to make up for your youthful folly, now is the time to buy. I don’t know where you were in 2016, but you shouldn’t miss that year’s opportunity a second time. 

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