ETF: Understanding the NewFunds NewSA ETF

This week, we feature South Africa’s only broad-based black economic empowerment (B-BBEE) ETF. The NewFunds NewSA ETF invests in South African companies based on their B-BBEE compliance ratings. The product allows investors to back companies that are committed to transformative, ethical business practices that benefit the South African economy.

Building wealth requires rational decision-making. Too often we are at the mercy of our own biases, which negatively impacts our financial security. However, our financial lives are only one part of a fuller life picture. Our ethics are reflected in our financial choices. Avoiding products because they were manufactured in exploitative conditions, for example, is a way to ensure that we’re using our money to shape the world around us.

Investors committed to transformation could certainly consider the NewFunds NewSA ETF. However, by its very nature, this ETF limits investors’ exposure to companies that operate offshore. Its exposure to the South African economy means this ETF should be part of an investment strategy that includes investments with offshore exposure.

Weekly expert: Nerina Visser

This week we asked ETF guru Nerina Visser to unpack the pros and cons of investing in the NewFunds NewSA ETF.

What sets this ETF apart from other ETFs?

This is the only ETF that has, as its basis for both selecting and weighting constituent companies, broad-based black economic empowerment (B-BBEE) criteria. The empowerment scores are measured by Empowerdex, an independent rating agency that specialises in the measuring and scoring of empowerment credentials, according to the Department of Trade and Industry’s (DTI’s) Codes of Good Practice on B-BBEE.

The index tracked by this ETF – the NewSA Index – has as its starting point the constituents of the “regular” FTSE/JSE Top40 Index. Empowerment credentials are then taken into consideration in two aspects:

Selection criteria: companies without the necessary B-BBEE scores are excluded from the index. This aspect penalises companies that don’t adhere to the required minimum standards.
Weighting methodology: the remaining qualifying companies have an additional load added to their weight in the index, based on their empowerment score. This aspect rewards companies with higher adherence to B-BBEE criteria.

What limitations should investors be aware of?

Although the principle behind this methodology is sound, and certainly commendable, it unfortunately suffers from some unintended consequences. International companies with a secondary listing on the JSE, but with limited or no operational footprint in SA, are not required to adhere to the DTI’s B-BBEE standards. But if a company does not have a B-BBEE score, it automatically gets excluded from the index. In addition, some SA companies with significant offshore operational exposure may be excluded on the basis of insufficient compliance on an aggregate basis for the whole organisation, as only the local operations are required to subscribe to the DTI’s criteria.

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

The biggest potential benefit to investing in this ETF is investing in a socially responsible investment (SRI) principle. Actual performance differentials are mostly coincidental (e.g. rand strength or weakness, performance of financial shares relative to resources and industrials – this ETF is overweight FINI stocks). Due to the dominance of international stocks in the Top40 portfolio, this methodology will be more relevant to SA mid and small cap shares. If applied across the All Share Index, rather than just the Top40, it may provide some measure of the impact of B-BBEE from a share price performance point of view. In a nutshell: only invest in this ETF if you want to tick a SRI box, but don’t cry if the rand weakens or financial shares fall out of bed, and your investment underperforms the rest of the market.

Unpacking the NewFunds NewSA ETF

ETF name	NewFunds NewSA ETF
ETF JSE code	NEWFSA
ETF issuer	NewFunds CIS
Issue date	01 December 2008
ETF TER*	0.54%
ETF benchmark	NewSA Index
Tax-free savings account	Investment allowed
ETF major holdings	Download the full constituent list here
Market cap*	R36m
Performance	1 year = -7.8% 3 year = +2.4% 5 year = +1.6%
Dividends	2.4%
What we like	This ETF offers an opportunity for investors to make investment decisions that reflect their ethics.