ETF: Understanding the GIVI SA Resource 15 ETF

Since the South African investment universe is small, we get a front-row seat to the impact of diversification during every market cycle. Historically the South African economy relied heavily on the resources sector. While we’re no longer a resource-heavy economy, our mines and energy businesses tend to shine when the rest of the economy suffers. A strong rand has a negative impact on the resources sector, which is reflected in the performance of resource shares in the Top40 index during periods of rand strength. Since certain sectors outperform during different market conditions, they create opportunities to outperform the market for investors who aren’t entirely passive.

The NewFunds S&P GIVI Resource 15 ETF offers undiluted exposure to the resource economy. The ETF aims to manage risk by including 15 resource shares, but capping the exposure to each share at 30%. Companies are only included in the index if they have a market capitalisation of at least R10bn and trade an average of R15m per day to ensure liquidity.

The sectors included in this ETF are basic resources, chemicals, oil and gas and industrial goods and services. As certain sectors outperform, their weighting in the ETF increases. In the current market, basic resources are dominating the index with no exposure at all to oil and gas or industrial goods or services. The only exposure to the chemicals sector is through the ETF’s Sasol holding, at 8.9%.

In 2016, Herenya Capital’s Petri Redelinghuys loved this ETF for its easy access to resources. Has his mind changed about the potential of this ETF?

What sets this ETF apart from similar ETFs?

This particular ETF is a little more diversified that the Satrix RESI ETF as it tracks the S&P GIVI SA Resources Index instead of the FTSE/JSE Capped Resources 10 Index. Cool fancy long names… but what do they mean? Most simply put, the GIVI index has a very different constitution than the RESI index that we know and love. The GIVI index tracks 15 companies whereas the RESI index only tracks 10 companies. This means that with the GIVI index ETF, you are able to get exposure to some chemicals (in the form of Sasol) as well as a significantly higher allocation to Glencore, translating into a portfolio with greater exposure to a diversified set of resources. Why does this matter? Well, if you look at the 1-year, 3-year and 5-year performances of the two ETFs, it’s clear that the S&P GIVI SA Resources Index (and thus this particular ETF) has outperformed the FTSE/JSE Capped Resources 10 Index over every timeframe.

What limitations should investors be aware of?

Putting all your eggs in one basket is always something to be weary of, so be careful of having only this one ETF in your portfolio. Other than that, major global macro shocks will be needed to significantly change the fortunes of this ETF. I guess, as has become a bit of a theme these days, the trade war between the US and China, combined with Brexit and perhaps some other as yet unseen catalyst could bring the global economy to its knees and then this ETF will not come out unscathed. Nothing will, for that matter. Another potential headwind could be a stronger Rand as this entire index could be considered a Rand hedge. Something to watch out for, although to reiterate, longer term investors with time on their side would likely not be sorry for owning this ETF.

What type of portfolio would benefit most from holding this ETF?

Long term investors who are looking for a more diversified, stable return and who would like to be invested in more ‘global’ companies. In general, resources can be somewhat volatile and cyclical, although if this ETF makes up a building block of a larger portfolio, I think it is well suited for everyone who has a long term (10 to 20 year) investment horizon. Also, maybe not a bad ETF to consider for the cost sensitive investor as the TER in this ETF is 0.25% vs 0.43% in the Satrix RESI ETF.

Unpacking the NewFunds S&P GIVI SA Resource 15 ETF

ETF name	NewFunds S&P GIVI SA Resource 15 ETF
JSE code	GIVRES
ETF issuer	Absa
Issue date	15 June 2009
TER*	0.25%
ETF benchmark	S&P GIVI SA Resources Index
Tax-free savings account	Investment allowed
ETF major holdings	GIVI SA Resi 15 ETF
Market cap*	R31m
Performance	1 year +2.1% 3 year +36.1% 5 year +32.1%
Dividends*	3%
What we like	While exposure to resources will always be cyclical and therefore never a long-term favourite, we like the 30% company cap on this ETF.