This week as we return to our Property ETF series, we cast a spotlight on the second of six in our list of JSE listed property ETFs investors can add to their share portfolios. The CoreShares Proptrax Ten ETF invests in the JSE’s ten biggest property companies by market capitalisation.
How is the fund put together?
The investment policy of the portfolio states that the funds’ aim is to track the FTSE/JSE SA Listed Property Top 10 Equal Index. The index is a custom index (see a description for this in the introductory article from a few weeks ago: 6 JSE-listed Property ETFs You Could Own) and is calculated independently by the FTSE/JSE.
The ETF will only include the constituents that are found in this index, selling those that are excluded following the quarterly index review, and buying those shares that are newly included.
The ten underlying shares are bought up in equal weightings of 10% each, irrespective of market capitalisation (the original qualifying criteria). Should there be no changes in the ten companies that make up the index, only rebalancing (back to the original 10% each allocation) takes place at the end of each quarterly review.
In the table below, those with keen eyes may notice eleven counters (not ten). This is because the allocation to Fortress is split across their A and B shares. Note as well, that although weightings are rebalanced quarterly, fluctuations will occur due to share price movements between reviews.
Table 1 - Full Holdings as of 31 January 2018 (Source: CoreShares Proptrax Ten Factsheet)
How does this ETF differ from others?
The biggest difference lies in the customised index that the ETF tracks. The fund limits the number of shares to the top ten by market capitalisation, but then equally weights the shares after the list has been drawn. The CoreShares Proptrax SAPY as well as the STANLIB SA Property ETF both hold more shares, however, the individual exposure to each share is determined by market cap weighting.
The end result is a concentrated portfolio of stocks that each have a significant level of exposure. For an example of how this can negatively impact returns, simply cast your eye over the preceding table and notice how the Resilient stable of companies (Resilient, Nepi Rockcastle, Greenbay, Fortress A and Fortress B) were all hit hard by the recent bad news and as a result, the weightings have significantly moved off kilter since the last rebalancing was implemented. Having said that, even though the Proptrax SAPY ETF didn’t hold Greenbay, the net exposure to the Resilient stable was very similar to the Proptrax Ten.
What type of portfolio would benefit most from holding this ETF?
- Growth-oriented portfolio looking to diversify away from equities only
- Income-oriented portfolio focused on income growth over time (Note, however, that the income is fully taxable and thus those with a lower marginal tax rate would benefit more)
- A portfolio that sits inside a Tax Free Savings Account would benefit from paying zero taxes on the income distributed by the ETF
- Portfolios that are exposed to physical property, looking to diversify into listed property
Table 2 - Key information as of 31 January 2018 (Source: CoreShares Proptrax TEN Factsheet)
Table 3 - CoreShares Proptrax TEN distribution history as at 31 January 2018 (Source: CoreShares Proptrax TEN Factsheet)
Share price history
An index tracking fund usually falls behind the index it is tracking, mainly due to transaction and management costs as well as tracking error. Included below is the extract of performance from the ETF’s minimum disclosure document as of 31 January 2018.
What is interesting is the performance differential between the TEN Index and the SAPY Index, a 1.3% annualised outperformance in favour of the TEN Index over the SAPY Index. The PropTrax Ten ETF was also able to beat both the SAPY Index and the CoreShares SAPY ETF on a three-year view, five-year view and since common inception (30 May 2011).
Source: Sharenet 10 year chart as of 23 March 2018
The share price, along with other property counters, was hit at the start of 2018. From a closing high of R22.90 at the end of December 2017, the price fell and closed at a R18.05 on Friday, 23 March 2018, the lowest daily price since 20 January 2016 close (R17.92). The current price represents a 21.17% drop, from its high.
Investment Specialist at Discovery Invest
Mark graduated with a Business Science Degree from the University of Cape Town in 2007. He then joined Sharenet, during which time he also completed his B.Com Honours through UNISA. Mark has helped to build, launch and manage derivative and share trading brokerage businesses. He is also a JSE Registered Securities Trader, and has worked on the trading desk at Sharenet. After seven-and-a-half years at Sharenet Mark then moved to Reitway Global (a specialist Global Listed Property Fund Manager) where his passion for property was further kindled. Mark currently works for Discovery Invest as an Investment Specialist on their Investec Managed fund offering. He has over ten years of experience in the equity and asset management sector and can be reached at: email@example.com
The views and opinions (where expressed) in this article are those of the author and do not necessarily reflect the official policy or position of Discovery Invest.