The 1nvest SWIX 40 ETF is a top 40 product with a difference. Like many other local products, this ETF invests in the 40 biggest companies listed on the JSE. Unlike other top 40 ETFs, however, this ETF doesn’t just invest more in bigger companies. In fact, weighting an index by local shareholders was the first taste of smart beta for South African shareholders.

To understand what makes this ETF different, it’s important to understand that each share issued entitles the shareholder to a vote. The more shares you have, the more votes you have.

When a company issues shares, not all of the shares go to individual shareholders. Some shares are sold to other companies, as well as shareholders outside of South Africa. Companies generally have more money than individual shareholders, so they tend to buy a large number of shares at a time. Just like us, companies have the right to vote on how other companies are run. Companies buy shares in other companies to help them make money, so they tend to hold the shares for a very long time. These shares aren’t available for sale on the stock exchange to individual South African investors in the secondary market.

If a company is listed on the JSE, as well as on a foreign exchange, sometimes the majority of that company’s shares aren’t available to South African shareholders at all. A number of companies represented in the Top 40 fit this description. The SWIX wants these companies’ weighting to reflect only the shares to which individual South African shareholders have access. The ETF simultaneously reflects the preferences of other South African shareholders and ensures there are shares available to be traded.

Once you weed out shares held by other companies and foreign shareholders, the weighting of these same Top 40 companies start to look quite different. Large companies listed on more than one exchange, like Richemont and British American Tobacco, don’t carry as much weight in the index as before.

Let’s use Richemont as an example. At the time of writing, Richemont is represented in both the Top 40 index and the SWIX 40 index. In the index weighted by market capitalisation, this company represents almost 10%. When you strip out the foreign shareholding, however, you are left with the 2.23% represented in the 1nvest SWIX 40. Quite a difference, no? If you are looking for an index representing the views of local investors, this is the one.

However, Keith McLachlan, fund manager at AlphaWealth warns cutting out the foreign holdings could have an adverse effect.

“Despite the predominance towards local liquidity for a weighting, Naspers currently dominates this ETF. This is an example of where the market cap, local free-float weighting rules of SWIX can lead to some fairly overweight positions. Also, in theory, this index will have lower rand hedge stocks in it than the traditional Top 40 Index. It (once again, theoretically) plays into a strong local market.”