Transparent South Africa

South Africa

Satrix lists momentum ETF + transparency

It’s an interesting day for the world’s best-performing equity market.

Satrix, one of South Africa’s big three ETF providers, is listing a first-of-a-kind momentum ETF that will give exposure to South Africa’s fastest growing companies. The Satrix Momentum Portfolio (STXMMT) will track a proprietary index built by Satrix.

The index tracks South African companies with momentum, where momentum is defined as “a composite of price momentum and earnings momentum as measured by analyst revisions,” the product factsheet says.

Satrix already has an index momentum fund.

From what we can tell this appears to be an ETF version of the same mutual fund. But the first South African momentum ETF nonetheless.

Analysis – South African smart beta funds are transparent on transaction costs

Smart beta is said to have two Achilles heels: transaction costs (effective spreads) and taxes. While an international value ETF may sound like a nice idea and a great way to harvest reinvested dividends, it can struggle because foreign governments – like Australia and Canada – take 15% of your dividend.

Momentum funds may sound like a great idea. But outside the US they can get hit with pretty hard transaction costs (they buy and sell a lot) which erode performance.

In recent years, ETF providers have become increasingly helpful about the tax implications of their international ETFs. (It’s usually in the prospectuses). But they’ve never been totally transparent about transaction costs. Indeed, a recent survey by EdHEC found that a lack of transaction cost transparency was deterring many investors.

But then we discovered South Africa.


South African ETF providers are required to publish how much investors lose to transaction costs. They have to express transaction costs in the same way they express fees: as a percentage of the daily NAV, calculated over a period of 1 year. They then put transaction costs on the fact sheet, next to all the other costs.

We’re not experts, so we’re not quite sure what “transaction costs” include (we know it includes brokerage, but does it include buy-sell spreads?). Or how this type of disclosure compares precisely to other jurisdictions.  But it’s good to see this type of transparency. Smart beta needs it.

And while overall these fees do look quite high, potential investors can take relief in the fact that historically, South Africa has provided the world’s best-performing equity market.

USA

Invesco widens smart beta bond fund offering

Invesco is listing two more multi-factor bond ETFs, this time targeting defensive and income opportunities. Both funds track an “index of indexes” where the index they track is made up of lots of little Invesco sub-indexes.

  • Invesco Multi-Factor Defensive Core Fixed Income ETF (IMFD)
  • Invesco Multi-Factor Income ETF (IMFI)

IMFD will track an index made of four sub-indexes. Their target allocations are:

  1. Invesco U.S. Treasury 1-3 Years Index (55% weight);
  2. Invesco U.S. Fixed Rate 30 Year MBS Index (20% weight);
  3. Invesco Investment Grade Defensive Index (15% weight);
  4. Invesco Emerging Markets Debt Defensive Index (10% weight).

Each of the subindexes are quite straightforward. The emerging market index is “defensive” in that its US dollar denominated and all securities must have a rating of B- or better. The index is rebalanced monthly.

IMFI will track an index made of a massive seven subindexes. Their target allocations are:

  1. Invesco U.S. Fixed Rate 30 Year MBS Index (25% weight);
  2. Invesco Emerging Markets Debt Value Index (15% weight);
  3. Invesco High Yield Defensive Index (15% weight);
  4. Invesco Investment Grade Value Index (15% weight);
  5. Invesco Emerging Markets Debt Defensive Index (10% weight);
  6. Invesco High Yield Value Index (10% weight);
  7. Invesco Investment Grade Defensive Index (10% weight).

The difference between the “value” and “defensive” versions of these indexes is the value indexes target higher yield. To ensure the resulting index doesn’t fill up with junk, Invesco adds a quality screen. The quality screen looks at credit ratings and maturity.