By: Chantal Marx
For South African investors, globally diversifying a portfolio by obtaining international assets has become crucial in enhancing portfolio return and reducing overall portfolio risk.
With the cost and complexities attached to investing offshore in mind, FNB listed several single-stock exchange-traded notes (ETNs) on the JSE in 2020 that have opened a new avenue of gaining offshore exposure for local retail investors.
At the end of April this year, FNB listed an additional eight ETNs, covering four prominent names, being Nvidia, Eli Lily, Palo Alto, and Booking Holdings.
Unpacking ETNs
An ETN is a type of security issued by a financial institution. It tracks the value of a basket of shares or individual shares.
The ETN's price fluctuates based on the underlying instrument's performance. For example, if an Nvidia ETN is purchased, the price of the ETN will increase based on the performance of the Nvidia share itself.
Investors do not physically own any shares; however, they obtain exposure to the company's performance based on the fluctuating ETN price. The better the company performs, the higher the price of the ETN and the more profit investors will make.
Each company can be accessed through a "Compo" option - which tracks the rand-based share price, and "Quanto" option - which tracks the dollar-based share price.
The Compo share price will reflect the movements of the rand relative to the USD and will outperform the Quanto option when the rand is weakening and underperform during periods of rand strength.
Advantages of ETNs:
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As the ETN is listed on the JSE, investors can obtain immediate access to international shares through the instrument without having to take funds offshore and comply with tax thresholds.
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Percentages of shares can be bought, meaning that should you have R1 000 to invest, you can still obtain exposure to Nvidia even though you don't have enough capital for one whole share.
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Investors can decide if they want access to currency risk through a dollar-based ETN or would prefer to hedge that risk through a rand-based ETN.
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Diversification benefit.
Risks of ETNs:
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The risks attached to investing in ETNs are the same when investing in the shares directly - you will be exposed to capital volatility attached to the underlying performance of the company and general market sentiment.
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Investing in rand-based ETN's may see investors lose out on the benefits attached to rand depreciation; on the flip side the dollar-based ETNs will underperform during periods of rand strength.
Summary view on the underlying companies:
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Nvidia (NVETNC, NVETNQ): Nvidia has been one of the main beneficiaries of the AI thematic that has dominated the US stock market over the last fifteen months. The company designs, develops and markets processing units for application in AI and gaming.
Nvidia's share price has performed exceptionally well over this time, but its growth prospects have more than kept pace.
The counter is trading on a forward PE of ~35 times, which is still below its long-term average rating.
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Eli Lily (LLETNC, LLETNQ): American pharmaceutical company, Eli Lilly, has benefited from strong sales of Mounjaro and Zepbound. Mounjaro is a diabetes treatment product that has been successfully used in weight management, while recently launched, Zepbound, has been specifically developed for chronic weight management.
On a forward PE of 51 times, Eli Lilly continues to trade at a meaningful premium relative to history and its peer group. The rating is expected to unwind rapidly, however, to 41 times in 24 months' time and 31 times in 26 months' time.
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Booking Holdings (BKETNC, BKETNQ): Booking Holdings is a leading provider of online travel and related services, operating in more than 220 countries through five primary consumer-facing brands namely: Booking.com, Priceline, Agoda, KAYAK and OpenTable. The company has, in recent years, benefited from a massive rebound in post-Covid travel.
Booking is trading on 18.8 times forward PE, well below its longer-term average rating.
The company trades at a premium to its peers but we believe this is justified given its comprehensive business model, scale, and market share.
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Palo Alto (PAETNC, PAETNQ): Palo Alto Networks Inc. is a global cybersecurity leader providing next-generation solutions to thousands of customers globally, across all sectors. In a world where cloud and AI applications continue to grow at a rapid pace, securing information will continue to dominate IT spending.
The stock is trading on a forward PE of 48.7 times, which is within its long-term fair value range.
For comprehensive assessments of the underlying companies, please look up our individual research reports on the FNB Investor Insights Portal.
