Exchange-traded funds (ETFs) are passive investment tools. We buy them and let them do their thing, creating wealth over time.
Yet, we then get smart and hope to pick the best ETF.
We try to figure out what sectors or geographies will perform best so that we can get increased returns.
The issue here is that, firstly, we may be wrong in our figuring and end up with poorer returns because we invested in wrong sectors or geographies.
The issue is that this picking of ‘better’ ETFs is an active decision.
This means that, in many ways, we mess with the whole concept of passive investing.
So, should we not then just buy a single global ETF?
One that broadly tracks global growth and at the same time gives us wide diversification?
People are moving from the rural countryside into cities, and people continue to earn more and spend more.
All this makes for a global growth story without having to decide which areas or sectors will do best.
If you believe in such a world view, there are four really different JSE-listed ETFs that offer global exposure.
The STXWDM tracks the MSCI Global Developed Market Index with a total expense ratio (TER) of 0.35%*.
This ETF excludes emerging markets and has financials as the top sector at around 25% with technology second at around 18%.
We also have the GLODIV from CoreShares with a TER of 0.6%.
Here dividends are used to filter the stocks and, for example, US stocks that are included have to have had 25 years of uninterrupted dividend payments.
Technology is very light in this ETF as many of today’s large tech stocks are not as yet even 25 years old, but it does include some 7% of emerging markets, excluding Africa.
Here consumer staples are your largest sector, at almost 20%, with tech stocks at 4%.
Consumer staples are typically fairly resilient, offering some level of stability.
Important here is that while ‘dividend’ is included in the full name of the ETF, the focus is not on higher dividend payments.
Rather it is merely the metric for inclusion.ASHGEQ**, with a TER of 0.56%, tracks the S&P Global 1200 Index from across the world, and includes 7% emerging markets (again also excluding Africa).
This is what makes it attractive to me. It has about 15% in technology and 14% in banks.
So, a little lighter on tech, albeit the top three holdings are Apple, Microsoft and Amazon and make up almost 6%. SYG500** tracks the S&P 500, with a TER of 0.16%.
While it is a US index, the stocks within the index are mostly global companies operating across the world.
For example, Apple is the largest holding and sells its products in almost every country in the world.
So, while it’s a US index, it is in some sense actually a global index.
Here we have technology at around 25% with financials the second-largest sector at some 18% (the inverse of the MSCI World Developed index).
Importantly, all these ETFs will trade in rand on the JSE, but the underlying indices are US-dollar priced and many of the stocks will be in yet other currencies.
As the rand strengthens (and for purposes of this example, assuming the index value does not change) the ETF price will fall.
As the rand weakens against the dollar, the ETF will rise.
This will not necessarily be linear, of course.
Broadly, during periods of a stronger rand, returns may not be so great compared to, say, a local Top40 ETF.
But over the long-term we can expect that rand weakness against the dollar will add some profits to the ETF.
* All TER rates are correct at time of writing on 22 March.