South African ETF investors have a choice of many products to get exposure to the JSE’s top shares, including Top 40, SWIX TOP 40, and All Share ETFs from Satrix, Sygnia, and 1NVEST.
ETFs (exchange-traded funds) are listed investment products that track the performance of a group of shares, bonds, or commodities.
They make it easy for investors to buy a basket of shares without having to acquire individual shares, which reduces costs.
ETFs have gained tremendous popularity even though the prototype for a modern-day ETF was only listed in Canada in the early nineties.
In South Africa, the Johannesburg Stock Exchange (JSE) introduced its first ETF to investors in November 2000.
The Satrix Top 40 was the bourse’s pioneer ETF listing. Its IPO was one of the biggest on the JSE, and it remains a favourite among investors.
Most ETFs are weighted by market cap, which means that as companies grow, they form a bigger and bigger part of the underlying ETF.
This strategy reduces the need for portfolio rebalancing and saves on transaction costs, but it has the side effect where a handful of companies dominate the performance of the index.
In South Africa, the result is that the FTSE/JSE All Share Index (ALSI) is dominated by foreign giants that are dual-listed on the JSE.
The Shareholder Weighted Index (SWIX) was introduced in response to this issue, and shares are weighted by an alternate free float, called the SWIX free float.
The SWIX method effectively only includes shares that are held locally in the index weighting, as measured by shares that are held by South Africa’s Central Securities Depository (STRATE).
Around 2016, Naspers comprised about 25% of the FTSE/JSE Shareholder Weighted All-Share (SWIX) index.
It prompted fund managers to switch to a Capped SWIX weighting methodology to reduce their concentration risk.
The FTSE/JSE Capped All Share Index (CAPI) limits the weighting of any single share to 10%.
In 2020, 47.1% of equity fund managers surveyed by Alexander Forbes used the FTSE/JSE Capped Shareholder Weighted Index (SWIX) All-Share index as their benchmark of choice.
ETF investors can similarly apply the SWIX or Capped weighting method when selecting their investments.
By selecting the SWIX Top 40 instead of the regular market cap weighted JSE Top 40, investors reduce their exposure to Richemont from 14.6% to 2.5% and to Anglo American from 11.7% to 5.4%.
This weighting is then distributed over the other companies in the index.
Alternatively, investors can buy a Capped All Share Index (CAPI) ETF to limit any company’s exposure to 10% and reduce the overall weighting of each of the Top 40 constituents.
It frees up 13% of the overall capital allocation to be spread across 86 of the smaller JSE companies.
Therefore, investors get exposure to the size risk factor that has historically been correlated to higher returns from smaller companies.
The table below shows the weighting of companies in each of the indexes as tracked by Satrix in June 2022.
|Stock||Top 40 Weight (%)||SWIX 40 Weight (%)||Capped All Share Weight (%)|
|Compagnie Financière Richemont SA||14.60||2.50||10.46|
|Anglo American plc||11.70||5.35||8.29|
|MTN Group Ltd.||3.94||5.17||3.55|
|Standard Bank Group Ltd.||3.41||4.49||3.06|
|British American Tobacco plc||3.00||3.94||2.71|
|Capitec Bank Holdings Ltd.||2.79||3.66||2.51|
|Impala Platinum Holdings Ltd.||2.44||3.21||2.21|
|Gold Fields Ltd.||2.22||1.87||2.00|
|Absa Group Ltd.||1.96||2.58||1.78|
|Sibanye Stillwater Ltd.||1.89||2.18||1.70|
|BHP Group Ltd.||1.86||2.45||1.69|
|AngloGold Ashanti Ltd.||1.70||1.46||1.52|
|Bid Corporation Ltd.||1.69||2.22||1.52|
|Shoprite Holdings Ltd.||1.59||2.09||1.43|
|Nedbank Group Ltd.||1.44||1.89||1.30|
|Anglo American Platinum Ltd.||1.32||1.74||1.20|
|Vodacom Group Ltd.||1.29||1.70||1.16|
|The Bidvest Group Ltd.||1.17||1.55||1.05|
|Clicks Group Ltd.||1.10||1.45||0.99|
|Northam Platinum Holdings Ltd.||1.05||1.38||0.96|
|Aspen Pharmacare Holdings Ltd.||0.86||1.13||0.78|
|Woolworths Holdings Ltd.||0.86||1.13||0.77|
|Old Mutual Ltd.||0.82||1.07||0.75|
|Anheuser-Busch InBev SA/NV||0.79||1.04||0.71|
|Exxaro Resources Ltd.||0.79||1.04||0.71|
|Mr Price Group Ltd.||0.75||0.99||0.68|
|Growthpoint Properties Ltd.||0.69||0.91||0.62|
|MultiChoice Group Ltd.||0.69||0.90||0.62|
|NEPI Rockcastle S.A.||0.67||0.88||0.60|
|Reinet Investments SCA||0.64||0.00||0.57|
|The Foschini Group Ltd.||0.00||0.85||0.58|