If you’ve ever watched the S&P 500 close flat overnight and then found your Satrix S&P 500 up 2% the next morning, you’ve already experienced the rand hedge effect. Most investors notice the anomaly. Fewer understand why it happens.
The mechanics, plainly.
A rand hedge ETF is any fund listed on the JSE that holds assets priced in a foreign currency, usually US dollars. The most common track the S&P 500, the Nasdaq 100, global indices like the MSCI World, or commodities like gold.
But the word “hedge” is misleading. These funds don’t actively hedge anything. The name reflects the fact that they offer natural protection against a weakening rand, because their underlying assets are denominated in hard currency. When the rand drops you get more rands for every dollar the fund holds, so the JSE price rises even if the market didn’t move.
That’s the core mechanic and everything else flows from it.
So how does the pricing actually work? The rand price of a foreign-tracking ETF is the product of two variables: the price of the underlying asset in foreign currency, and the rand/dollar exchange rate. Multiply them and you get the rand value of one ETF unit.
Say the S&P 500 is flat for the day but the rand weakens from R16.00 to R16.50 against the dollar, a move of about 3.1%. Your rand hedge ETF rises roughly 3.1% in rand terms, purely because of currency, even though nothing happened in New York.
The reverse is equally true. The S&P 500 could rally 3% overnight, but if the rand strengthens 3% on the same day your ETF price barely moves. The market gain is cancelled out by the currency move.
Importantly, this means tracking only the underlying index tells you less than half the story. You need to watch both the market and the rand/dollar rate.
There’s also an intraday quirk. Most JSE-listed ETFs tracking foreign indices price off the previous night’s closing value, because US and global markets are closed during JSE hours. During the JSE trading day the live ETF price drifts almost entirely on the rand/dollar exchange rate. Not because the underlying market is moving, but because the rand is. (We have a great video with the 1nvest market maker explaining this).
For a long-term investor this intraday noise is irrelevant. But if you’re trying to time a specific entry price, the mechanism matters.
What’s available on the JSE? Dozens of options now. The most popular track the S&P 500, with Satrix, Sygnia, 10X Investment, 1nvest, FNB and 1nvest all running versions. Then Nasdaq 100 trackers, global property funds and gold ETFs. They differ mainly in their total expense ratios (TERs) and how closely they track the underlying index.
The Just One Lap ETF Database is the easiest place to compare.
So should you hold them? For most South African investors, yes, at least some allocation. The rand has a long track record of weakening against the dollar over time. Rand hedge ETFs give you automatic exposure to that depreciation without needing to move money offshore yourself.
But they’re not a one-way bet. A strengthening rand, or a US market draw down, can both work against you. Occasionally at the same time. During periods of rand strength a rand hedge ETF can under perform local alternatives even if the US market is rising.
Now sure, that dual exposure is what makes the returns potentially exceptional, but it’s also what makes them confusing. A rand hedge ETF is not purely a bet on the US market. It’s a bet on both the US market and the rand/dollar exchange rate simultaneously. Get both right and the returns can be exceptional. Get one wrong and the other might bail you out. Get both wrong and there’s nowhere to hide.
That dual exposure is exactly why the pricing mechanics are worth understanding before you buy.
ETF blog
At Just One Lap, we are big fans of passive investment using ETFs. In this weekly blog, we discuss ETFs on the local market and the factors you need to consider when choosing an ETF. If you have wondered how one ETF differs from another, this is where you can find out. We explain which index each ETF tracks, what type of portfolio could benefit from holding each ETF, and how the costs will affect your bottom line.
