Resource 10 Index

Johannesburg Stock Exchange

Established in 1887, the Johannesburg Stock Exchange started from humble beginnings during the first gold rush in South Africa. The first legislation that covered the financial markets was implemented in 1947 and by 1963, the JSE had become a member of the World Federation of Exchanges.

During the early 1990s, the JSE, alongside all other stock exchanges around the globe, upgraded to an electronic trading system, simplifying the process involved with buying, selling, and trading shares across borders.

JSE demutualized and was listed on its own exchange in 2005, with AltX launched as an alternative exchange where small and mid-sized listings would be listed.

Introduction to Market Indexes

Market Indexes refer to hypothetical portfolios that contain investment holdings. These holdings represent a certain portion of the financial market, and the value thereof is derived from prices associated with underlying holdings.

While most values found on the indexes are either based on market cap or revenue weighting, others are based on float weighting and fundamental weighting, with weighting referring to the method used to adjust the individual impact that items in an index have.

Different market indexes will attract different investors depending on their investment objectives, risk tolerance, and several other metrics. Every index has its own methodology according to which it is calculated and maintained by the provider of the index.

Investors tend to use market indexes to follow certain financial markets and to manage their portfolios. Investors often prefer investing in an index over individual stocks to effectively diversify their portfolio.

Index investment is one of many ways to optimize returns while simultaneously mitigating and balancing investment risks.

Types of Market Indexes

Market indexes are often sued as proxies for the overall stock market but there are many indexes in the world and each tailors to represent certain segments of the overall market. The common type of market indexes are:

• Environmental, Social, Governance (ESG) – which features indexes that concentrate on companies that score well on how they treat their employees, the environment, and society overall.
• Global indexes allow investors to track the overall performance of all companies in the world.
• National Indexes that track the performance of the South African financial market.
• Growth Indexes track the performance of prominent companies.
• Value indexes group companies together, especially those considered undervalued.
• Sector indexes that track the performance of certain industries, of which the Resource-10 index forms part as it tracks the resource sector in South Africa

Overview of the Resource-10 Index

Also known as the “RESI 10”, the Resource-10 Index is the FTSE/JSE Africa Index Series Resource 10 Index.

This index tracks the 10 largest companies in South Africa according to their market capitalization in the resource sector. The RESI 10 is an investment that is suited to investors who seek broad exposure to the stock market, especially the resource sector in South Africa.

It is considered a lower-risk alternative to investing in underlying shares and it also appeals to investors who have a slightly bullish view of the stock market, including those who favor the resource sector over a certain share contained in the sector.

The 10 companies are exposed to the mining sector and the inclusion of companies such as Sappi Limited and Mondi PLC will provide traders with exposure to the packaging and paper industry.

At the time of writing, the Resource-10 Index consists of the following companies:

• BHP Billiton PLC (SA) with a 53.76% weighting
• Anglo American PLC (SA) with a 14.08% weighting
• Sasol Ltd with an 8.21% weighting
• MND-ZA with a 4.62% weighting
• Mondi PLC with a 4.62% weighting
• AngloGold Ashanti Ltd (SA) with a 2.49% weighting
• Exxaro Resources Ltd with a 1.72% weighting
• Impala Platinum Holdings Ltd with a 1.44% weighting
• Gold Fields Ltd with a 1.42% weighting
• Sappi Ltd with a 1.08% weighting

Why should you consider trading the South Africa Resource-10 Index?

Apart from several other indexes that can be traded in South Africa, the Resource-10 Index is known to provide traders with direct exposure to the largest resource counters that are locally listed.

This index can be used when traders speculate on either the rise or the fall of the overall resources sector and associated industries. This could have a direct link to movements in certain commodity prices in addition to affecting the value of the rand against other currencies.

Companies that are on the Resource-10 Index derive a large sum of their overall earnings in foreign currencies, especially in the United States Dollar. This means that trading the Resource-10 Index could be a rand hedge play in the overall foreign exchange market.

Investors who have their sights set on long-term investment holdings, especially in the mining and resource sector, can consider the Resource-10 index because of the wide exposure that it provides. The Resource-10 index can also be used as a hedge by investors and it can help to protect their underlying portfolios when a “short” position is taken against their investment.

What are Index Funds?

This is considered a type of mutual or Exchange-traded fund (ETF), which is a portfolio that is developed to track the components of a certain market index, such as the Resource-10 Index.

An index mutual fund is known to provide investors with broad market exposure in addition to reducing their operational expenses and following their benchmark despite the market conditions.

Index Funds make it easier for investors to diversify their portfolios and it removes the tedious task of picking individual stocks for investment. There is an index and an index fund for every financial market in the world, with several indexes such as the Resource-10 featuring amongst the most popular ones in South Africa that track companies in the resources sector.

The advantages of investing in an index fund relate to:

• The ultimate in diversification
• Stronger long-term return on investment
• It is an ideal option for passive, buy-and-hold investors who want to build their wealth
• There are lower expense ratios

The disadvantages relating to index funds involve:

• Investors can be vulnerable to sudden market swings and crashes
• There is an inherent lack of flexibility in choosing shares that form part of the overall fund
• The human element is removed
• There may be limited gains