Satrix Managers has launched its fifteenth ETF, the Satrix Momentum ETF (STXMMT SJ), on Johannesburg Stock Exchange.
The fund is the country’s first ETF to explicitly target returns attributable to the momentum factor within the local equity market.
The fund is the issuer’s fourth smart beta ETF and the country’s first to provide investors with access to a portfolio of locally listed equities that have been weighted in order to enhance exposure to the momentum risk premium.
The underlying reference for the ETF is the proprietary Satrix Momentum Index which is selects constituents from a universe of large- and mid-cap stocks listed on the JSE, excluding real estate counters, participatory interests, debentures, ETFs, warrants, and convertible stocks.
Scores in terms of price momentum and earnings momentum are generated for each eligible stock, determined as a percentile ranking relative to other the scores of other stocks. The price and earnings momentum scores are then aggregated for each stock to produce a set of composite momentum scores.
The stocks are then weighted using a Barra optimization model that seeks to maximize the composite momentum score of the index while satisfying certain constraints. Constraints include maintaining a tracking error relative to the JSE Shareholder Weighted Index (JSE SWIX) of within 4% and limiting the deviation of individual stock weights.
Stocks are screened for liquidity on an ongoing basis. Those that fall below a threshold have their weight reduced to the stock’s weight in the JSE SWIX.
Jason Swartz, Head of Portfolio Solutions at Satrix, commented, “While the alpha embedded within a momentum strategy is powerful, both the risk management and implementation of the strategy is crucial when harnessing this alpha. Momentum strategies can be vulnerable at turning points and generate large volatility, and thus tempering the portfolio with sound risk overlays is critical.
“When it comes to implementation, we focus on ensuring existing alpha is not eroded through excessive turnover and subsequent fund costs, all the while maintaining a fresh and pure momentum signal in the portfolio.”
The index is reviewed and rebalanced eight times per year. The largest sector weights are currently Financials (35.1%), Consumer Services (24.2%), and Basic Materials (21.6%) while the largest single holdings are Naspers (10.1%), Sasol (8.9%), Firstrand (7.6%), Standard Bank (5.9%) and BHP Billiton (5.2%).
Using simulated back-testing, the index has performed well over three, five, and ten year time horizons. For example, the index has returned 11.3% per annum over the past five years compared to 8.1% for the JSE SWIX.
The fund would likely suit investors seeking longer-term capital growth (greater than five years) who understand the potential for increased volatility that comes from investing in an index with a narrower focus.
The fund has a targeted total expense ratio (TER) of 0.40%. Distributions are made on a quarterly basis.