Page 157 - Profile's Unit Trusts & Collective Investments - September 2025

Classification of CISs Chapter 8

Dow Jones Industrial Average (DJIA)
The DJIA is an index of approximately 30 blue chip US stocks. At over 100 years, it is the oldest
continuing US market index. It is called an average because it was originally computed by
adding up stock prices and dividing by the number of stocks. (The very first average price of
industrial stocks, on 26 May 1896, was 40.94.) The methodology remains the same today, but the divisor
has been changed to preserve historical continuity. The DJIA is the best-known market indicator in the
world, partly because it is old enough that many generations of investors have become accustomed to
quoting it, and partly because the US stock market is the globe’s biggest.
Overseas, there are many index funds which track the DJIA.
as little as 0.10% VAT included. The largest funds in the US have total ongoing charges as low as
0.04% and 0.015% per annum and Morningstar reports that the weighted average fee for all passive
funds is 0.36% as of 2023.
It must be stressed that Index funds cannot be compared with one another unless they seek to
follow the same index. The best Index fund is not the one which performs the best in terms of returns,
but the one with the least tracking error – the one that tracks its chosen index the closest.
Index funds around the world track a wide (and increasingly diverse) range of indices, from narrow
regional indices to global indices and smart indices (see below). In SA the most tracked index is the
FTSE/JSE Top40. This index is sometimes skewed in favour mining and commodity stock, which
historically have constituted a disproportionate percentage of the JSE.
More than 240 rand-denominated index funds are available to investors in SA. They track
everything from property, financials and industrials to specific overseas markets such as Japan,
Europe and the US. Many of these are also exchange traded funds (ETFs).

Smart indices
Until the early 2000s, most indices around the world were either simple averages (see Dow Jones
box) or, more usually, market cap weighted. Index funds and ETFs that track indices weighted by
market cap are tacitly endorsing the idea that the market price of a share is a good valuation of the
company. The basic assumption of a market cap weighted index is that the market values shares
correctly; the larger the market cap of a stock, therefore, the bigger its influence within the index.
Smart indices (also known as smart beta indices) take the view that the share price is not
necessarily the best reflection of a company’s value. The Rafi, for example, is an index created by
US-based Research Affiliates using fundamental valuation criteria – metrics such as sales, cashflow,
book value and dividends. This can change not only the index constituents but also the weighting of
shares within the index. In 2024, for example, the Rafi40 included four shares not in the Top40, and
the latter included five shares not in the Rafi40.
Beta refers to the return of “the market”, and market cap weighted indices are the accepted proxy
for “the market”. The term “smart beta” derives from the idea that there are other ways to represent
“the market” and better ways to construct indices. Market cap weighted indices automatically
overweight overvalued stocks and underweight under-valued stocks; by focussing on other
factors, smart beta developers believe they can create cleverer indices designed to outperform
conventional indices.

SWIX and DIVI
The SWIX (shareholder weighted) indices contain the same constituents as the market cap
indices but weight the constituents according to free float (ie, the number of shares freely
available in the local market). This reduces the weightings within the index of big dual-
listed shares like British American Tobacco and BHP Billiton.
In the name of a passive fund, DIVI usually refers to the JSE’s Dividend Plus index, which contains the
30 shares with the highest forecast dividend yields. The index is weighted by dividends, which means
that the DIVI is effectively a value style index.

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