TIP: Unclear on the link between ETFs and indices? We explain that here.
The Newfunds Equity Momentum ETF is a factor-based ETF. While it considers all listed companies, but only includes the 20 companies whose share prices rose most in the previous 12 months. The companies are weighted by the amount of risk they contribute to the overall index, not by company size. That means risky companies take up less space in the index than companies that are more stable. That methodology helps to stabilise this ETF, whose investment strategy makes it prone to volatility.
This ETF is built to take advantage of rising share prices, which is more likely during rising markets. When things are tough, it’s likely to underperform because there won’t be many companies whose share prices are going up. However, stocking up on this ETF when markets are low will have your portfolio in gear to coin it once share prices start rising again.
This is a total return ETF, meaning dividends get reinvested into the ETF instead of being paid out to you. Sadly, dividend withholding tax is still deducted from the dividend before it gets reinvested, even though you never receive the cash. The price of each ETF unit increases by the amount you would have received in dividends. If you had planned to reinvest your dividends anyway, opting for a total return ETF saves you money in the long run. If you had taken cash dividends to buy more shares, you would have had to pay a brokerage fee on that transaction. That said, this ETF is not cheap.
Since this is a factor-based ETF, companies whose share prices stop rising have to be removed when the ETF is reweighed. Since share prices turn on a dime, this happens more often than in ETFs that aren’t factor-based. Combine that with the ETF’s fancy risk-adjusted methodology and reinvested dividends, and you have an admin-intensive ETF on your hands. While the TER is only 0.3%, the effective annual cost of this ETF is currently 1.42%.
Unpacking the NewFunds Momentum Equity ETF
|ETF name||NewFunds Momentum Equity ETF|
|Issue date||26 January 2012|
|ETF benchmark||Absa Wits Risk-Controlled SA-Momentum Index|
|Tax-free savings account||Investment allowed|
|ETF major holdings||Sasol, BHP Billiton, Growthpoint, AVI Limited, Anglo American PLC, Pick n Pay, Clicks Group, Naspers, Discovery Holdings. View the full list here..|
|Performance||1 year -16.8%
3 years -7.9%
5 years +18.8%
|What we like||This ETF tries to offer a smoother ride by giving volatile companies a lower weighting.|
*10 May 2016
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