Tafara Mtutu:investment analyst
THE Zimbabwe Stock Exchange (ZSE) started the New Year on a different note with the maiden listing of the Old Mutual ZSE Top Ten Exchange Traded Fund (ETF). An ETF is a financial instrument that mimics an index or theme. These themes can range from asset class, sector, region, country, currency and more.
ETFs carry several advantages and disadvantages, some of which will be unpacked below. The newly listed ETF is off to a good start after it traded 4,7 million shares for ZW$4,74 million (US$58 017) on the 4th of January 2021 and closed 0,22% higher at ZW$100,22 (US$1,22) per unit. While ETFs are new to the local bourse, there are currently over 6,970 ETFs globally with a combined market capitalisation of over US$5,75 trillion.
According to its prospectus, the investment objective of the ETF is to provide investment results that, before fees and expenses, closely correspond to the performance of the ZSE Top Ten Index. The pie chart below shows the constituents of the ZSE Top Ten Index that the ETF will mimic.
Source: ZSE, Morgan & Co Research
The index, through the actions of the manager (Old Mutual Invest Group), will also ensure that the proportions are from time to time rebalanced to reflect any changes that may happen to the counters in the ZSE Top Ten. Given that the ZSE Top Ten Index is rebalanced on a quarterly basis, it is likely that rebalancing will take place on a quarterly basis. Any dividends accruing to the portfolio will be distributed to unit holders. Below are some cons and pros that investor should be aware of before taking a position in the ETF;
ETFs offer exposure to a theme without having to individually invest in the theme’s constituents. This means that one can invest in an ETF and mimic returns that are similar to a certain region or asset class.
ETFs are passively managed, which means that they incur lower fees in comparison to actively managed investments. Old Mutual’s ZSE Top Ten ETF incurs only 0,675% per annum.
Some ETFs distribute all dividends, if any, as soon as they are paid by the counters that make up the ETF. The ZSE Top 10 Index comprises of stock that have been consistent dividend-payers. These include CBZ Holdings (Estimated Dividend Yield of 1,6%), Delta Corporation (4%), FBC Holdings (4%), Hippo Valley Estates (1,3%), Innscor Africa (2,7%), OK Zimbabwe (5,8%) and Padenga Holdings (039%).
ETFs are typically more liquid than some of their individual constituents.
For the retail investor, the Old Mutual ZSE Top Ten ETF allows one to invest into blue chip stocks with less capital. Given the minimum purchase quantity of 100 units on ZSE for any counter, a retail investor would need at least ZW$85 000 (US$1 040) to individually get exposure in all counters in the ZSE Top Ten Index. Alternatively, the investor can get exposure with as little as ZW$200 (US$2,44) through the Old Mutual Top 10 ETF which costs ZW$1,00 per unit.
For the institutional investor, the ETF allows asset managers to maintain exposure to equities that drive overall market performance (as opposed to holding funds as cash) during portfolio restructuring, rebalancing, and even managerial changes.
Most ETFs are not well diversified in comparison to actively managed portfolios. Old Mutual’s ZSE Top 10 ETF, for example, is largely exposed to the financial services sector which accounts for 40,5% (CBZ Holdings, FBC Holdings and Cassava Smartech) of the portfolio, according to the current constituents of the ZSE Top 10 Index.
Market cap-based ETF performance is largely driven by the size of the stocks more than fundamentals. ETFs that are based on market cap-weighted indices often go against the investment rule of buying low and selling high. When the ETF is rebalanced, counters that would have increased in market capitalisation typically hold less upside compared to the smaller counters. This is also affirmed by the market size anomaly in arbitrage pricing theory that has been observed in many stock markets, where small cap stocks usually outperform large cap stocks. This was also observed on the ZSE in 2020 where the Top Ten Index registered a 720.72% increase, and the Small Cap Index registered an increase of 1,769.62% as at 31 December 2020. Further, the ZSE Top Ten Index includes Cassava Smartech and Econet, two large cap stocks that have reported losses for the past 18 months.
The ETF is traded in the same way as any stock on the bourse. Institutional investors can contact their stockbroker to place a trade on the ETF. Retail investor platforms (ZSE Direct and C-Trade) are yet to onboard the ETF before the end of January pending some ICT configurations. Many of the stocks currently in the ZSE Top Ten Index, which includes FBC Holdings, Padenga, SeedCo Limited, OK Zimbabwe, Innscor and Delta Corporation, have strong investment cases.
However, whether the ETF should be a part of one’s portfolio is dependent on one’s investment objectives, horizon, and risk budget. I would recommend that you get in touch with your stockbroker or wealth manager for more information.
Mtutu is an investment analyst with Morgan & Co. He writes in his personal capacity.