Amid multi-decade-high US interest rates and evolving market conditions, exchange-traded funds (ETFs) are emerging as integral components in personal share portfolios managed by professionals. These innovative investment vehicles have gained significant traction in recent years, revolutionising how wealth managers and portfolio managers approach the construction of portfolios.
The beauty of ETFs lies in their ability to allow investors to buy a broad range of securities in a single trade, and the most sophisticated portfolio managers in South Africa are already using ETFs alongside traditional stock picking to increase diversification and address macroeconomic shifts. With the almost $12-trillion global ETF industry poised for exponential growth, it’s crucial to understand their role in enhancing portfolio diversification and managing risk. ETFs can deliver simple, long-term exposure to a whole asset class, geographic region, sector or theme, particularly in the bond market, which was previously hard to access.
Personal share portfolios
Actively managed ETFs (AMETFs) are the latest addition to the investment landscape in South Africa. While some market participants may be confused, having always associated ETFs with index-tracking (also known as “passive”) investment strategies, the new regulations allow multi-asset solutions, traditional active mandates and many other types of strategies to be listed in the efficient and convenient ETF fund format, being labelled as an AMETF.
Multi-asset income AMETFs offer investors a comprehensive, managed income solution in the listed format. The 10X Income AMETF, for example, offers a strategic asset allocation spreading the investment across money markets, government bonds and corporate credit, locally and abroad. The fund is designed to deliver returns that beat inflation by 2.5 percentage points over rolling three-year periods while controlling volatility for a smoother ride. With a maximum duration of three years and an attractive, steady yield, this ETF presents a compelling opportunity for investors seeking consistent, low-risk returns while navigating the complexities of the fixed-income markets.
Integrating ETFs, especially fixed-income ETFs, into traditionally stock-dominated portfolios reflects a notable trend. This strategic allocation approach emphasises the importance of blending individual stocks with ETFs to achieve optimal diversification and risk management. By combining the stability and income potential of fixed-income ETFs with the growth potential of individual stocks, investors can create a well-rounded portfolio that balances risk and return.
Defensive global equity exposure
In recent years, market-cap weighted global benchmarks have become heavily concentrated in US equities and the technology sector respectively. With the tech mega-caps trading at eye-watering multiples and US valuations causing concern, many investors are now seeking different indices. For example, in light of the geopolitical and economic worries facing global markets and the associated investor preference for more defensive global allocations, one strategy in focus is an index that screens for companies that have demonstrated reliable earnings through the cycle, the S&P Global Dividend Aristocrats index. This strategy selects companies with a long history of paying and growing their dividends. These businesses are robust, cash generative, or as the Boston Consulting Group would call them – “cash cows” – and are well-placed to weather challenging economic conditions. By comparison to market-cap-weighted global indices, this index offers a more diversified geographic spread (with a lower US weighting). It is underweighting the technology sector while being overweight on the resilient consumer staples sector.
An ETF based on this benchmark, for example, is a convenient and attractive “building block” that can be added to local share portfolios as a diversified, quality, global equity allocation. It is well-suited to investors who want to participate in equity markets with a defensive tilt due to the quality and robust nature of the companies that make up the strategy.
While we could extend this article to unpack many other interesting JSE-listed exposures, the point worth noting, in summary, is that ETFs have become indispensable tools for investors navigating the complexities of today’s investment landscape. Their simplicity, accessibility and cost-effectiveness make them valuable assets in constructing diversified share portfolios. As the ETF landscape evolves, including ETFs in share portfolios will be essential for achieving superior outcomes in personal investments. By staying informed and embracing the benefits of ETFs, investors can position themselves for long-term success in an ever-changing market environment.
