Absa Capital announced today that R400m has poured into South Africa’s first eRAFI™ Exchange Traded Fund (ETF) since its listing in June, making it one of the most popular new investment options this year.
Dr Vladimir Nedeljkovic, head of ETFs and Index Products at Absa Capital said that the eRAFI™ Overall SA Index, the index being tracked by the eRAFI™ ETF, has outperformed its benchmark JSE All Share Index by 18% in the past three months.
The new eRAFI™ ETF is compiled using the innovative enhanced Research Affiliates Fundamental Index™ (eRAFI™) approach to portfolio construction pioneered by California-based Research Affiliates. The eRAFI™ ETF methodology weights shares based on fundamental valuation metrics - sales, cash flow, book price and dividends - rather than market capitalisation.
Absa Capital, together with local investment manager Plexus Asset Management, exclusively manage the eRAFI™ ETF in South Africa.
“We expect the eRAFI™ ETF to continue to be hugely popular with institutional and private investors alike,” said Nedeljkovic. “The eRAFI™ ETF overcomes the typical problems associated with ETFs that use the market capitalisation method of indexing, that over-weights stocks that are overvalued in the market and under-weights stocks that are undervalued – the opposite of good investment practice.”
It is also cheaper than unit trusts, and over time, a far better performer added Nedeljkovic.
When comparing the returns of various asset classes in South Africa over the last 10 years, the back-tested eRAFI™ index far outperformed other asset classes with a 28.3% annual average return. The second best performer was the All Share index at 18.8%, followed by the JSE’s top 40 shares at 16.5%, property at 13.1% and cash at 11.1%.
“RAFI™ strategies have outperformed cap-weighted index strategies by more than 2.5% per annum internationally, in over 23 mature stock markets, and significantly more in emerging markets over extended measurement periods,” said Nedeljkovic.
The eRAFI™ also differs from the RAFI™ ETF. The eRAFI™ on average gives an additional 20-30% return above the RAFI out performance of capitalisation weighted indexation.
The RAFI only rebalances its portfolio once a year, has fewer filters for stock picking and also does not pay out dividends but reinvests them.
“The eRAFI™ methodology provides all the benefits of traditional market capitalisation-weighted indices, including diversification, liquidity, low turnover and competitive fees, while generating incrementally higher returns with lower volatility,” said Nedeljkovic.
According to Nedeljkovic the South African market, especially pension funds, are waking up to the advantages of passive index trackers. Consequently there will be a proliferation in both the number of ETFs listed on the JSE, as well as the amount of money invested in these products over the next few years.
Note to the editor:
About Absa Capital
Absa Capital, a division of Absa Bank Limited (Absa) and affiliated to Barclays Capital, is a leading South African investment bank with global reach, offering clients financing, risk management and advisory solutions in a wide range of currencies and structures across the globe.
About eRAFI™ Exchange Traded Fund:
The eRAFI™ Exchange Traded Fund (ETF) is an open ended collective investment and the size of funds under management is expected to grow. It is comprised of 40 shares selected using the RAFI™ fundamental selection criteria from the JSE top 100 shares based on market capitalisation and the portfolio will be rebalanced quarterly.
About Absa Capital ETFs and Index Products:
Absa Capital is a leading originator of exchange traded funds (ETFs) in the South African market. The investment bank listed and operates NewRand, the first ETF in South Africa based on a proprietary investible index (the NewRand Index, comprising rand hedge stocks with the highest correlation with the Rand/USD exchange rate), as well as NewGold, the first and only gold ETF in South Africa as well as the largest ETF in the SA market with R6.5billion in assets under management.
ETFs are open-ended collective investment schemes that are listed on a stock exchange and which can be traded at any time throughout the course of the day. Typically, ETFs try to replicate a stock market index such as the FTSE/JSE Top 40 Index, a market sector such as resources or financials, or a commodity such as gold.