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Wits finance geeks take on ETF industry with sexy new funds

EDINBURGH — Wits finance geeks have created sexy new funds designed to shake up the Exchange Traded Fund (ETF) industry. They have, together with Absa, developed a low volatility ETF and an ETF that aims to emulate the approach of Warren Buffett, possibly the world’s most successful investor. ETFs have grown in popularity globally as they are seen as a lower-cost alternative to funds that are managed by the highly paid rock stars of the investment world. Costs eat into returns, so the lower you can keep them, the better for long term gains. – Jackie Cameron

Wits media statement:

The listing of the Absa Wits NewFunds Low Volatility ETF and the Absa Wits NewFunds Value ETF on the JSE

On Monday, 26 March 2018 Wits made history when two Exchange Traded Funds developed at the university were launched on the JSE. These products are a result of multi-year collaboration between Wits and Absa and essentially offer an inexpensive rules-based risk-factor strategy to investors, allowing them to better manage their risk. The tools also create the ability to outperform a market index without resorting to active stock picking.

The Absa Wits NewFunds products were developed by a research team of the Wits Finance Division (which is located in the School of Economics and Business Sciences) of James Britten, Daniel Page and David McClelland, led by Professor Christo Auret. This team of Finance academics has published internationally on factor-based investment approaches and solutions.

Employees pass signage for Barclays Plc outside the headquarters of Absa Group Ltd. in Johannesburg. Photographer: Nadine Hutton/Bloomberg

The launch of the Equity Premia range ETFs is an exciting development in the investment area. The Wits team is continuously exploring and evaluating other factors and sees this as an important evolving area of research. Dean of the CLM Faculty, Professor Imraan Valodia said “This is a great example of how the University’s expertise in finance research is contributing to innovation in financial markets and improving the quality of these instruments.”

About the funds: Low Volatility ETF

Volatility can be described as a measure of the dispersion of stock price returns, around the average. Past theory suggested that more volatility resulted in higher reward and hence better returns (“the higher the risk, the higher the return”– sound familiar?). However, it was found that low-volatility stocks (stocks exhibiting a more stable experience through time) outperformed high-volatility stocks. This is widely described as the low-volatility anomaly. Beta is a measure comparing the movements of a stock’s price against the market as a whole. A low beta would indicate that a stock is less likely to respond to extreme market movements.

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The NewFunds Low Volatility Equity ETF is aimed at providing an Investor with diversified exposure to 20 highly liquid constituent securities in the South African equity market that exhibit the lowest volatility as well as a low beta to the market in their performance by tracking the Absa Wits Risk-Controlled SA Low Volatility Index where the constituent security’s weights in the Low Volatility Index is determined by applying an equal risk contribution weighting scheme. The Low Volatility Index was created by Absa Bank Limited in collaboration with Wits University using their Findata@Wits® database. The ETF is total return in nature therefore all dividends and income received in the Portfolio is reinvested at each income distribution date.

Value ETF

Value investing considers stocks that can be described as ‘cheap’ or undervalued based on well-defined accounting ratios. Price-to-earnings (P/E), based on income statement attributes, is an indication of what investors are willing to pay per unit of earnings of a company. A low P/E is indicative of an undervalued stock. Price-to-book (P/B), based on balance sheet attributes, compares the market value of a company to its book value. A low P/B is again indicative of an undervalued stock.

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The NewFunds Value Equity ETF is aimed at providing Investors with diversified exposure to 30 highly liquid constituents securities in the South African equity market that exhibit value characteristics (low price-to-earnings and price-to-book ratios) in their performance by tracking the Absa Wits Risk-Controlled SA Value Index, where the constituent security’s weights in the Value Index are determined by applying an equal risk contribution weighting scheme. The Value Index was created by Absa Bank Limited in collaboration with Wits University using their Findata@Wits® database. The ETF is total return in nature therefore all dividends and income received in the Portfolio is reinvested at each income distribution date.

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