ETFs are innovative investment vehicles that have gained significant traction in recent years, revolutionising how wealth managers and portfolio managers approach the construction of individual share portfolios.
Michelle Noth, head of financial intermediaries at 10X Investments, says their ETF range has netted strong inflows on the back of strategic integration of ETFs within share portfolios. The most sophisticated portfolio managers in South Africa are using ETFs alongside traditional stock picking to increase diversification and address macroeconomic shifts.
The growing adoption of ETFs locally sheds light on the benefits of incorporating ETFs into personal share portfolios. They provide investors with simplicity, accessibility, and cost-effectiveness, making them suitable for all types of investors.
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.
Amid multi-decade-high US interest rates and evolving market conditions, ETFs have emerged as fundamental components in constructing diversified share portfolios. ETFs can deliver simple, long-term exposure to a whole asset class, geographic region, sector or theme. The beauty of ETFs lies in their ability to allow investors to buy a broad range of securities in a single trade.
This versatility enables investors to adapt to macroeconomic shifts actively and capitalise on emerging opportunities, particularly in the bond market, which was previously hard to access.
Meet the 10X Income AMETF
Actively managed ETFs, known as AMETFs, are the latest addition to the investment landscape in South Africa, with 10X listing the first of its kind early last year. 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.
The innovative 10X Income AMETF (with a memorable share code, INCOME) is co-managed by a seasoned duo, Anton Eser and Chris Eddy, and offers investors a comprehensive, managed income solution in listed format.
The strategic asset allocation spreads 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 a current yield of 9.7%*, 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.
Note: The 10X Income strategy is available as both an AMETF listed on the JSE as well as a traditional unit trust via linked investment service providers (Lisps) (to intermediaries) or via the My10X Portal online (to self-directed investors), providing flexible access to all types of investors. There is close to R13 billion* invested in the strategy.
10X S&P Global Dividend Aristocrats ETF – a quality global allocation
One way of achieving a defensive equity allocation is by seeking out companies that have demonstrated reliable earnings through the cycle.
A well-established index franchise aiming to capture these companies is the S&P Dividend Aristocrats range, and 10X manages the 10X S&P Global Dividend Aristocrats ETF (share code: GLODIV). 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.
This ETF is a convenient and attractive ‘building block’ that can be added to local share portfolios as a diversified, quality, global equity allocation.
Reliable dividend payers
Many investors prioritise cash flow metrics above all others when analysing companies. Cash-generative companies tend to have disciplined management teams, proven business models and low levels of financial gearing. This implies quality, which makes them attractive assets. Furthermore, cash flow difficulties are usually one of the earliest warning signs that a business is in trouble because cashflows are very difficult to manipulate. These companies are typically reliable dividend payers.
Systematic company selection
An index that selects shares based on their dividend payout histories is comparable to many dividend-centric active mandates but instead is delivered through a low-cost index solution. Thanks to data and index technology, indices are transparent and can systematically screen thousands of companies with these attractive dividend characteristics.
The 10X Global Dividend Aristocrats ETF 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.
In addition, the 10X Global Dividend Aristocrats ETF is liquid, transparent and well-diversified. There is close to R2.5 billion invested in this ETF; the historic dividend yield is 1.9%, and the ETF has returned an annualised average of 14.4% since inception six years ago (versus the Asisa Global Equity General category of 13.1%).
In summary, 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.
* Yield to maturity as at 23 January 2024. Assets under management as at end December 2023. Historic dividend yield and 2023 net performance as at end December 2023. Performance is calculated using NAV (net asset value) to NAV figures, is based on a lump sum investment, and distributions are included prior to the deduction of applicable taxes levied in the hands of individual investors. Past performance is not indicative of future performance.
Visit www.intermediaries.10x.co.za for more information.
10X Fund Managers (RF) (Pty) Ltd is an approved manager of collective investment schemes in securities in terms of Section 42 of the Collective Investments Schemes Control Act, 45 of 2002 by the Financial Sector Conduct Authority.
The content herein is provided as general information; it is not intended to, nor does it constitute, financial, tax, legal, investment, or other advice.
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