Once we start investing, most of us are in pursuit of the perfect investment. What we want, of course, is the unicorn that goes to the moon the day after we invested. Luckily, we understand our ability to find that needle in the haystack at precisely the right moment is slim indeed.
We have to content ourselves with an investment that spreads our risk while delivering growth. There’s nothing sexy about it and we’ll certainly miss out on the overnight successes. However, we’re also far less likely to lose our net worth on a gamble. The Ashburton 1200 ETF (ASHGEQ) has been the Just One Lap preferred ETF since we did this podcast. In this post, we’ll explain why.
How to think about ETFs
Once you understand what an ETF is, comparing products becomes simple. By applying the following criteria, you can get a sense of where exactly your money is going:
- Asset class
In this post, we are going to unpack all of these elements and explain how it applies to the Ashburton 1200. We encourage you to go through this process with each ETF you hold. It’s a great way to understand your investment and will highlight possible over-exposure – the easiest way to unintentionally introduce risk to your portfolio.
In the ETF space, you can get access to the following asset classes:
- Shares (also called equities, purely to confuse you)
- Preference shares
- Commodities (not available in tax-free accounts)
For most of us, the type of asset class we choose has to do with how long we plan to remain invested. Share prices go up and down a lot, but tend to go higher than the other asset classes over time. You want to hold shares long enough to give it time to grow. In the short-term, having to sell shares could result in selling at a lower price than you paid. This is called losing money and we hate it.
The asset classes in the list have fewer price movements and lower growth as you go down, with the exception of commodities. Commodities are typically stuff we get out of the ground, like gold and oil. These things have wild price movements and should therefore mostly be ignored unless you know what you’re doing.
If you plan to be invested for ten years or more, something we highly encourage, you want to focus your attention on shares. You can tolerate the short-term price movements because you don’t have to sell any time soon. These investments are fire-and-forget, see-you-in-a-decade jobs. The Ashburton 1200 invests mostly in shares, with a teeny amount of property and basic materials (another word for commodities) thrown in for fun.
We want our investments to make money wherever there’s money to be made. If companies that are listed in America do wonderfully, but companies that are listed in Europe lose money, we’d rather be invested in America. The problem is that at any moment any one region could be doing better than another, so we invest in all of them.
Not only does this strategy mean we invest in more single companies, but it also ensures we are where the action is. By investing all over the world, we can make money from regions that are growing even when other regions don’t make money. The hope is that the regions that do well will do better than the regions that do poorly.
If the part of your ETF that is invested in America grows 30% and the part that’s invested in Europe falls 15%, you are 15% ahead. It would have been better to be invested in America alone, except that we don’t know when America will be the loser and Europe will be the winner.
The Ashburton 1200 ETF invests in seven different regions and 30 different countries. As the name implies, it invests in (slightly over) 1200 companies. If one falls flat, the others are there to carry it.
The emerging markets thing
The difference between this ETF and other global ETFs available to South African investors (with the exception of the CoreShares Global Dividend Aristocrat), is its exposure to emerging market economies. These are countries that are still growing. Just like a baby will grow more in a year than an adult, these economies have more room to grow than older, more stable economies. You don’t want to invest too much into these economies, because just like a baby they can also fall over at any moment. The Ashburton 1200 invests a little into Latin American and Asian economies, offering some exposure to economies with lots of potential while still keeping things stable by investing in developed economies.
Just like you don’t want to invest too much money into one region, you want to avoid spending too much money in one sector. Economies tend to go through cycles where certain companies do better than others. Once again, you want a finger in every pie so you don’t miss out on the action, but you don’t want to take a bet on a single one.
Since the Ashburton 1200 invests in so many companies, you get exposure to many different sectors across the world. What’s great about this is that one sector could be under-performing in one economy, but doing very well in another. It evens out your experience in the long run.
In this ETF, you can expect exposure to the following sectors:
- Technology – 16.57%
- Financials – 14.20%
- Health Care – 11.22%
- Consumer Goods – 10.80%
- Industrials – 10.69%
- Specialist Securities – 10.35%
- Consumer Services – 9.58%
- Oil & Gas – 4.19%
- Utilities – 3.21%
- Telecommunications – 2.62%
- Chemicals – 2.56%
- Basic Materials – 1.26%
As you can see, you still get exposure to companies that operate in the commodities space without taking a risk on a single commodity. If these companies do poorly globally, the ETF will automatically reduce your exposure.
This ETF is the sum of seven other indices, namely the S&P500 (US), S&P Europe 350, S&P TOPIX 150 (Japan), S&P/TSX 60 (Canada), S&P/ASX All Australian 50, S&P Asia 50 and S&P Latin America 40. All the companies represented in these indices are included in the Ashbburton 1200.
Even though it may seem like it at first glance, the Ashburton 1200 is not a feeder fund. A feeder fund will buy ETFs that track those indices to make a new ETF. The Ashburton 1200 actually buys the underlying shares that make up all those indices.
The Ashburton 1200 is weighted by market capitalisation. That means bigger companies get more space in the ETF. However, because this ETF invests in so many companies, the top 10 constituents only make up 10% of the index. If you invested R100 and the share prices of all the top 10 companies in this index go to R0, you’d still have R90 left. Isn’t diversification lovely?
How much it costs to invest has a huge impact on the amount of money we’ll end up with at the end of our investment. When you buy an ETF, you pay for the transaction every time you buy. That’s called a brokerage fee and it includes some taxes and JSE fees that we pay every time we buy and sell a share. This transaction fee differs by platform, so your first port of call is to find a broker that charges as little as possible.
To manage financial products costs the product provider money. Like any other business, ETF issuers have staff, offices and coffee that cost money. They also need to pay for services that make it possible to run an ETF. Nerina Visser explains exactly what those fees are in this excellent presentation.
The easiest fee to find when comparing ETFs is the total expense ratio (TER). For this ETF, that is 0.62%. That means, every year 0.62% of the value of your total investment will be deducted from the dividends due to you to run the ETF. We never see the money leave our account, because it’s deducted from money paid out to us before it even hits our accounts. It is, however, critical to keep a close eye on this.
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