The JSE is the largest stock exchange in Africa and one of the world’s most important hubs for the purchasing and sale of stocks in hundreds of African companies.
To provide new ways for stock market investors to assess the state of the market, the JSE set up a variety of indices, which together measure the overall performance of many economic sectors in South Africa, including the financial, industrial and resource sectors.
Of the JSE indices, the most significant is the Top 40 Index, which includes the 40 biggest companies listed on the JSE. These are ranked and weighted according to size, and the changes to the stock price of these companies is tracked and the total index is calculated.
The rules that are used to calculate the index are available to investors and as such are transparent, while the calculations are carried out by computers and updated with price changes.
The JSE Top 40 Index is regarded as the best indicator of the overall performance of the companies listed on the JSE and is a widely shared metric, both by those who are monitoring the state of the market and those who are planning to invest in JSE Top 40 companies. In fact, it is also possible to invest in the index itself, as this article aims to explain.
Is The Top 40 Index A Good Choice For Investors?
An index like the JSE Top 40 is designed to mirror the overall performance of a bigger market, so if an index properly represents that market, an understanding of the underlying market conditions and the companies involved can make the index a good investment.
In the case of the JSE Top 40, although the 40 companies involved represent less than 10% of the companies on the exchange, they account for a surprising 80% overall market value. So, the top 40 can be said to fully represent the performance of stocks in South Africa.
At the same time, the top 40, like any other index, will reflect the underlying stability or volatility of the overall market. In 2022, there were significant causes of turbulence in the global economy, including the Russian invasion of Ukraine, high inflation and high interest rates, and the JSE Top 40 reflected this volatility, making it a sometimes-risky investment, requiring caution on the part of the investor.
How To Invest In The Top 40 Index
So, how can you invest in the Top 40 Index? There are three main ways to invest using the index: ETFs, individual stocks and mutual funds.
Top 40 Exchange-Traded Fund
This is an investment fund that includes all the top 40 stocks in the Top 40 Index. You can buy and sell this ETF and its value will be determined by how well the overall index performs. ETFs offer a good balance of flexibility and diversity for investors.
Individual Stocks
Another way to invest in the Top 40 Index is to buy stock for many of the individual companies in the top 40 – or even all of them. These can then be whittled down to the best performing stocks. This approach is time consuming, however, so is only suitable for those with plenty of time and money.
Mutual Funds
A mutual fund is very similar to an ETF. It is an investment fund that combines money from many investors and is used to track the JSE Top 40 Index. Unlike ETFs, which can be purchased at any time during trading, mutual funds can only be bought at the end of the trading day, and they also cost more to trade than ETFs. This makes them ideally suited to those who are aiming to hold a JSE Top 40 Index investment for a significant period of time.
The Top 10
One method to assess the Top 40 Index is to focus on the top 10 stocks within it. The JSE top 10 companies comprise almost 60% of the top 40 and have more influence on the movement of the index than the other stocks. So, getting to know these top stocks can make it easier to assess the Top 40 Index as a whole and predict which way it may move:
- AB InBev – Beverages and Brewing.
- BAT – Tobacco.
- SABMiller – Brewer.
- Naspers – Media and Entertainment.
- Glencore – Mining and Commodity Trading.
- Richemont – Luxury Goods.
- BHP Billiton – Mining and Petroleum.
- Anglo American – Mining.
- Steinhoff – Retailer and Manufacturer
- FirstRand – Financial Services Provider.
Summary
The JSE Top 40 Index is not a straightforward vehicle for investment, but for those who know the top South African companies well, who fully understand how the Top 40 works and who are also fully aware of the risks, this can represent a viable investment opportunity.
