Global markets keep reaching new highs and many stock valuations look stretched just as the US Federal Reserve pivots hawkishly into increasingly sticky inflation.
Against this backdrop, it is worth being more selective in this year’s investment decisions. This is also timed with the reset of everyone’s tax-free savings account annual allowance of R36 000 per annum in March 2022.
Enter two particularly interesting niche exchange-traded funds (ETFs) that were recently launched …
Satrix Global Infrastructure Feeder ETF
This offshore ETF invests in listed companies that develop, own, operate, manage and/or maintain structures or networks used for the processing or moving of goods, services, information/data, people, energy or necessities from one location to another. ‘Infrastructure’ has toll road-like characteristics, from literal toll roads to power generation to ports and even telecommunications and data centres.
While often capital-intensive to build, these assets are generally considered defensive with strong, steady free cash flows as their users often have few (or no) alternatives and are inelastic to price increases.
Despite these attractive features and, other than Grindrod (code: GND) and maybe our listed telcos, the JSE has few real investable infrastructure plays – and certainly no good global ones.
A slightly more granular look at this ETF’s constituents reveals nearly 52% in utilities, 25% in industrials and the balance in energy, real estate and communication. Over 63% lies in the US, 12% in Canada and the balance mostly spread across the developed world. Finally, the underlying 237 individual holdings have a price-earnings ratio of 25.9x and a dividend yield of 1.9% in US dollars.
With a total expense ratio (TER) of 0.78%, this ETF is somewhat expensive – but the defensive, yielding characteristics of its global underlyings makes it a unique offering in our local market with defensive, rand-hedge characteristics.
Sygnia Itrix Solactive Healthcare 150 ETF
This niche developed market ETF tracks the Solactive Developed Markets Healthcare 150 Index, which replicates the free float weighted performance of the largest 150 companies from the healthcare industry.
While the Covid-19 pandemic has highlighted the importance of the healthcare sector, it is also likely to lead to an innovation-led boom in this area – ranging from an explosion in mRNA vaccine uses to remote medical care and so on.
Traditionally, healthcare has a defensive underpin as it is often non-discretionary in nature with high regulatory barriers to entry.
Once again, despite the attractiveness of the healthcare sector, the JSE has relatively few healthcare counters to choose from.
Importantly, the JSE has none of the major global healthcare players on it.
Thus, tracking a global healthcare index allows an investor to gain the optionality of medical innovation while diversifying their local portfolio.
This ETF’s top holdings include UnitedHealth Group (5.6% weighting), Johnson & Johnson (5.5%) and Pfizer (4.1%), with a chunky 71.9% of its portfolio lying in the US and 8.2% in Switzerland.
To sum up …
As mentioned at the outset, investors should probably be far more selective this year with market risks weighing on the downside.
Coupled with the ability to potentially access these ETFs through tax-free savings accounts, the above two niche ETFs offer unique, defensive and, potentially, quite attractive options for local investors.
Keith McLachlan is investment officer at Integral Asset Management. He has shares in Pfizer.