Rand Merchant Bank – MidCap ETF

Some fresh ground has been broken with the listing on the JSE on 15th August of a new ETF – the RMB MidCap ETF. This ETF tracks the FTSE/JSE MidCap Index of 61 listed shares on the JSE, with the companies in this index ranked from 43 to 103 in terms of t

These mid cap companies, typically have market capitalisation of between R6 billion to R25 billion, so are relatively liquid shares that contain many companies currently showing market leading performance and earnings growth. The sector composition and top ten holdings of the RMB MidCap ETF are shown below.

The RMB MidCap ETF offers a good spread between property, retailers, financial and other services companies typically not provided by any other indices. With 61 companies in the portfolio, this ETF has the largest portfolio of any domestic ETF listed on the JSE. This spread across a number of companies and sectors provides substantial diversification benefits.

Performance

The Table below shows that the FTSE/JSE MidCap index has comfortably outperformed the JSE All share over the past five years and for the periods in between. The RMB MidCap ETF exactly replicates the FTSE/JSE MidCap index, by physically holding each of the 61 constituent shares in exactly the weightings assigned by the index compilers.

RMB have indicated that the annual management costs of the MidCap ETF will be 0,5% per annum, dropping to 0,2% per annum for any investors who invest over R20 million in the product. A total of R90 million in RMB MidCap securities were listed on 15^th August and RMB will provide market making services to ensure that there is liquidity in the product.

The Investment Case

· Index tracking products typically focus on the large cap stocks that provide ample liquidity and depth to ensure good tracking performance. The shift in interest in the JSE towards the middle cap stocks, outside of the Top 40, has, however, ensured ample liquidity in many such shares and provided good performance potential for investors. RMB has calculated that about 10% of the MidCap index changes on an annual basis, which should enable them to rebalance the MidCap ETF cost effectively and efficiently to take into account movement of counters into and out of the index.

· In the early stages of equity market up-cycles (when the market moves back to its previous highs – so called mean reversion) large capitalisation shares typically receive the most attention from investors. Subsequently, MidCap and Smaller Cap stocks receive greater attention. The JSE may have entered this cyclical stage, which would mean that the launch of the RMB MidCap ETF is well timed.

· The RMB MidCap ETF is a registered Collective Investment Scheme, so investors are purchasing a participatory interest into a portfolio of 61 stocks that are physically held by the Manager. This provides a well diversified and well balanced spread of investments.

· The Unit Trust Surveys indicate that MidCap Collective Investment Schemes have been amongst the top performing equity funds in South Africa over the past seven years. Adding a low cost, publically traded ETF to the Unit Trust funds available in this sector, provides a further option to investors looking for exposure to mid-size companies.

· The RMB MidCap ETF can be purchased through JSE member stockbrokers, or alternatively through the etfSA Investor Scheme^®, which is a platform providing access to all 58 JSE listed ETPs. Investments can take place from R1000 for lump sums and R300 for debit orders through etfSA (http://www.etfsa.co.za/)