There is no upper limit to the potential performance of a share. It’s unintuitive, but it’s true. A share price that has gone up 100% can go up another 200% and then 300% after that. Share prices are determined by supply and demand in the market. When investors see a share price going up, they like to get in on the action, driving the price up further. This can go on forever, if you’re really, really lucky.* This tendency for share prices to continue going up once they started is called “momentum”.
The Newfunds Equity Momentum ETF (share code: NFEMOM) is a factor-based ETF. Under the hood are 20 South African listed 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.
The NFEMOM is built to take advantage of rising share prices, which is more likely during rising markets. In troubled times this ETF can also add some spice to a stale or falling portfolio. Regardless of what’s happening in the market, the ETF cares only about rising prices. That means you will always be holding the winners.
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 1.56%.
*Equally good news is if you’re just buying an ordinary share, the price can only fall by 100%. Your potential upside is infinite while you only risk losing what you put in.
|ETF name||NewFunds Equity Momentum ETF|
|Issue date||26 January 2012|
|Total investment cost||1.56%|
|ETF Benchmark||Absa Wits Risk-Controlled|
|Tax-free savings account||Investment allowed|
|ETF major holdings||Vodacom, British America Tobacco, Aspen, Prosus, Mondi, Reinet, Naspers, Quilter, Exxaro, Bhp Group Plc|
|Performance 1 year||-2.1%|
|Performance 5 years||+26.1%|
|Performance since listing||+125.2%|
|Dividend yield||Total return|