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How should investors evaluate SA’s S&P 500 ETFs?

Is tracking error a useful measure?
Strange anomaly … investors may wonder how it is possible for an ETF to have a large negative tracking error when the underlying fund has a much smaller, and positive, tracking error. Picture: Shutterstock

There are currently four exchange-traded funds (ETFs) listed on the JSE that track the S&P 500 Index. Only three of them have at least a one-year track record, and as the table below shows, their performance over 2018 was varied.

Performance of S&P 500 ETFs
Fund 2018 return
CoreShares S&P 500 9.76%
Satrix S&P 500 9.37%
Sygnia Itrix S&P 500 10.81%

Source: Media

It’s also worth noting that according to S&P Dow Jones Indices, the return of the S&P 500 in rands last year was 11.1%. All three of these funds therefore underperformed the index.

Tracking error

This difference between the index return and that of a fund tracking that index is what is known as ‘tracking error’. It is generally an indication of how efficiently and effectively the fund manager is replicating the performance of the index.

CoreShares and Sygnia both replicate the index themselves. However, the Satrix product is a feeder fund that invests directly into the iShares Core S&P 500 UCITS ETF, which is managed by BlackRock and listed in London.

This is noteworthy because, measured in US dollars, the iShares fund returned -4.72% last year, against the -4.94% of its benchmark. In other words, this ETF actually outperformed the index.

Investors may ask how it is possible that the Satrix fund had a large, negative tracking error, when the underlying fund had a much smaller, and positive tracking error. It seems a strange anomaly.

Market price vs NAV

Kingsley Williams, Satrix’s chief investment officer, says the difference has to do with how the fund is structured. The Satrix ETF reports its performance based on the market price of the iShares fund in London. This market price is set every day when the London Stock Exchange closes.

However, the US market is still open for some time after this happens, which means that the share prices of the companies in the S&P 500 Index will still change. Even though the London Stock Exchange is closed, the net asset value (NAV) of the iShares fund will therefore continue to move.

The difference in the performance of the two funds comes about because the iShares ETF uses this NAV to calculate its performance. It is therefore reporting a different number.

“Because of this timing and pricing mismatch, the performance over any period is always going to be subject to differences,” Williams explains. “So if, for example, after London closes you had a situation where the S&P 500 declines, you would find that the Satrix ETF, because it locks in the performance at the London close, would outperform the benchmark.”

Noise vs real impact

Since performance is always quoted from one specific day to another specific day, the pricing differences between the NAV of the iShares fund and its market closing price on those particular days will always impact on the Satrix ETF’s reported performance. The question is how much this matters.

“The longer the period over which you measure this, the smaller those differences should become,” says Nerina Visser, strategist at “On a one-day basis, it can be really very noisy and you can see big apparent tracking error discrepancies. But it is noise rather than anything of importance because there are many other factors involved.”

One of those is dividend flows. The Satrix S&P 500 ETF is a total return fund, which means that all dividends are automatically reinvested. The CoreShares and Sygnia products pay out dividends twice a year – CoreShares in March and September, and Sygnia in June and December.

“The timing of those dividend payouts, and at what exchange rate, would impact overall returns,” says Visser. “The rand has been extremely volatile, so if one fund paid a distribution one day, and another does it a few months later, there could be quite a difference in the actual dividends received in rands.”

Cash and currency

It’s also important to consider that although these funds only pay dividends twice a year, they are collecting them from the underlying companies throughout this period. Between the time they are received and the time they are paid out, they are held in cash.

“Normally this would be a ‘cash drag’ on the portfolio, which could weaken returns – but in a year where the market performed quite poorly, having excess cash could actually have boosted their performance,” Visser says.

Another impact would come from the currency. These are all funds quoting a rand-based return on what is a dollar-based index.

“The return has to be converted into rands – but using what rate, at what time, and at what spread?” Visser points out. “This is not an insignificant factor, because these funds may all be using difference exchange rates at different times.”

Evaluating the funds

This may all seem very confusing for an investor, since these are technical issues that they can’t really evaluate. So how does one choose which of these funds to invest in?

“I would be loathe to say that one is better than the other on the basis of observed returns over a relatively short period of time because there are so many things that affected it,” Visser argues. “It’s not as though this is evidence of a fund manager that is particularly good or particularly bad.”

She therefore suggests that investors should rather focus on two things that are clear and apparent.

“The easy one to start with is total expense ratio (TER), because that will have a direct impact on your performance over time,” she says. “The second one would be to ask whether you need to have dividends paid out. Would you prefer the benefit of having them reinvested inside the fund, at no extra cost? If I’m taking dividends out as income, then I certainly want to have a distributing fund, but if I’m reinvesting I would prefer a cumulative fund, because then I don’t have to pay for it.”



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All these funds are influenced by the usd to zar rate, you could win or lose depending on the exchange rate. The S&P500 could have the best year in history and you could still lose money because of our wonderful Rand, and vice versa. If you want to invest on the S&P500 then just open a foreign trading account in USD on the NYSE to get a real indication. Investing in SA is always a gamble because of our fantastic government..

Agree & very interesting “D&T”.

I’ve been researching (but left it up to a certain point) the possibility of an SA-resident directly dealing with (online) Share-trading platforms, located in say the US, UK, Oz, Germany, or elsewhere.

Problem usually is the “know your client” (FICA in SA) requirements. Which foreign stockbroker will allow foreigners a share-trading account?? Plus, you’d have to have a banking account in the same country (currency) in order to transfer payments into foreign stockbroking account.
Now, assuming the foreign online equity trading site allows foreigners to open profiles (i.e. it passes the FICA part, providing they’re happy with an SA res address), one does not necessarily need a foreign bank account to deposit funds into the foreign stockbroker’s banking account…..but will need a foreign bank account (i.e. held in your own name) when you instruct the stockbroker to withdraw from your trading-account.

Maybe other commentators can help. What about opening a “Foreign Currency Account, FCA” within SA (as offered by the big-4 local banks)…provided it has a SWIFT/IBAN address, surely funds from foreign stockbroker can remit in South African “FCA” (..that is if you decide to retire/remain in SA, but have you funds directly abroad).

Or if you plan to emigrate, yes then make sure your stockbroker is located in the same country (where you plan to emigrate) so that you can open an account there.

Very interesting topic. Actually this needs a dedicated MW article! 🙂

easiest way is to open an “Absa world trader account” its located on their stockbroking website. Then select that you want to trade on the NYSE in USD. Once that’s all done and all the relevant paperwork is done you can then transfer money into that account. As per the norm in SA you will be ripped off with fees for transferring money so try do a large amount to mitigate that. You can then trade directly on the NYSE in USD, your money would have been converted into USD when you transferred it. Absa charge $20 per trade so try do large trades to mitigate that one as well.

PS. I have this account and its pretty straight forward, the fees are a rip off, but what in SA isn’t

Exactly. The tracking error that occurs in local index funds that tracks international indexes contributes to exactly this. If you look here you can see that the available index funds all have a tracking error of sometimes almost 2%. But then again the same can probably be said of a lot of local index funds as well.

If it’s good enough for the sage of Omaha, it’s good enough for me.

Any one of these S&P500 ETF’s will take good care of you overtime. Just put money every month, forget and reap the rewards down the road.

I agree 100%

I invested in the Coreshares S&P500 until the Sygnia ETF came along with a MUCH lower TER, so I left the funds already invested in the Coreshares ETF and started contributing to the cheaper alternative. Over time, they all will take good care of me.

Other than the TER, there’s not much you as an investor have control over – just buy the cheapie, sit back and wait for the markets to do their magic!

But make sure that it is a physical ETF not a total return swap when looking at this otherwise the diversification is out of the window as your counter-party credit risk would be the issuing bank!

In the US some of the SP 500 trackers are free -as the manager makes money from the stock lending only! Also for South Africans an accumulator fund could probably defer the ANC stealing tax on the dividends

As someone said here-if its good enough for Mr Buffett -its good enough for anyone!!

You start with Rands that you have earned in SA. Whether you buy a rand-based ETF, like Sygnia S&P 500, or convert to dollars now and use an offshore broker to buy S&P 500, you will get the same result from currency movements and the underlying shares/holdings.

However, you will lose money upfront in currency conversion costs. These are upwards of 2%! You can see the spread here…and your broker/third party may add more.

If you continue to live in SA and one day need the money back here (capital or dividends), you will be on the receiving end of another set of currency conversion costs of > 2% one day. Be warned, currency conversion is a murky world where you very quickly part with money. Hence, if you want money that you will keep offshore ad infinitum, then part with your currency conversion costs now…but it comes at a price!

Also, be warned, US and UK domiciled ETFs are subject to 40% estate duty, no matter where you live in the world.

Warren Buffet advises the man in the street (and his wife) to invest in an S&P 500 ETF. With the Sygnia your only costs are brokerage, spread and an annual TC of 0.22%. A bargain!

Check out SPIVA performance to see ETF vs fund manager performances

5 charts that show the flow from active to passive funds

…the reasons are simple…
(if you can’t beat ‘em, join ‘em)
(even Warren Buffett, an active fund manager, said so)
(check out the results for different countries across various time periods)

10 and 15 year results of active fund managers who stay in business are even more abysmal
“Over the 15-year investment horizon, 92.43% of large-cap managers, 95.13% of mid-cap managers, and 97.70% of small-cap managers failed to outperform on a relative basis.”

The results are even worse than the above! Why?
“Approximately 79% and 57% of all domestic funds survive over 5- and 10-year investment horizons, respectively.”

Thanks. You have just convinced me to move my retirement savings from my current active managers to passive/index managers, namely 10X. Returns are similar, but fees are less. That means I have more money in my funds for longer. It’s all in the fees!!!!

Excellent advice! Things are not always as wonderful as they seem….

Estate duty (inheritance tax) UK, first £325000,00 is exempt

US inheritance tax, first $60,000.00 is exempt

UK capital gains tax is generally 18% but can be lower or higher depending on income and whether its speculative gain

Advise please. I have invested on the NYSE through an S&P 500 ETF (VOO). Question is how would you best “protect” this investment, in a bear market? I was thinking of a short ETF on the S&P 500? If so what short etf is recommended? Don’t really want to sell and buy again. Thanks.

you don’t.. just buy the same ETF every month no matter what the market is doing, don’t try and time it and don’t invest in one big gulp unless its a few months after a stock market crash.

@ death and taxes – short and sweet. I fully concur! It is not the timing of the market, but the time in the market. VOO is an excellent choice over the long term.

When is my platform provider going to offer these?

Today they only offer Satrix MSCI World Equity Index Feeder Fund (Class B2).

Both Nedgroup and Investec outperformed this etf in 2018.

Satrix MSCI World Equity Index Feeder Fund (Class B2) name indicates it’s a Unit Trust and not an ETF (there are differences). Does your provider offer any ETFs?

Hi supersunbird, they offer Satrix ALSI Index Fund (Class B2). TER is 0.43% and 0.35% respectively.

Not quite an etf but almost.

“The World Equity Tracker Fund (underlying fund) employs optimisation
techniques to track the performance of the index, rather than attempting to hold all of the securities in the index”

You may wish to open an Easyequities account. Brokerage 0.25% and no custodian fees, platform/LISP fees or other hidden costs

I want to withdrawal money on atm

End of comments.





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