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Exchange Traded Funds (ETFs) are becoming increasingly popular in South Africa, as investors seek to diversify their portfolios and take advantage of the benefits of passive investment. ETFs are a type of investment fund that is traded on a stock exchange, and they provide investors with exposure to a wide range of underlying assets, such as stocks, bonds, and commodities.
ETFs are similar to a unit trust fund in that they pool together the investments of multiple investors to create a diversified portfolio of assets. However, unlike unit trust funds, ETFs are traded on an exchange in the same way as individual shares, and they are priced throughout the trading day, rather than just once per day as is the case with unit trust funds. This provides investors with greater flexibility in terms of when they can buy and sell shares, and it also allows for the use of advanced trading strategies like limit orders and stop-loss orders.
ETFs offer investors the opportunity to invest in a wide range of assets with just one investment meaning the investor enjoys greater diversification. An investor, may for example, want to gain exposure to the biggest companies listed on the JSE and instead of having to buy a share in each company, which will not only be an expensive exercise, but also an admin intensive one, the investor can easily get this exposure by rather buying just the ETF that holds these 40 companies as underlying investments. This provides a high level of diversification as well as helps to reduce the risk of the investor’s portfolio.
It is important to understand that actively managed investments, such as Unit Trust funds aim to outperform the market and give investors higher returns compared to market returns. Highly skilled managers, usually with many years of experience, manage these active funds and use expensive resources that will increase the management costs of such funds. Actively managed funds also tend to have higher transactional costs since more trades are made, which will also result in increased overall costs that may further diminish the ultimate profits that investors can expect to receive.
Passive investments, such as ETFs, on the other hand gives investors access to a sector or portfolio of shares that delivers a return close to that of the market. Due to lower management and transactional fees of passively invested funds, the actual return of such funds, after fees are deducted, may be higher compared to actively managed funds. There are also debates amongst investment professionals about whether it is at all possible to outperform the market in the long run with an actively managed investment style. Due to the lower costs of such investments, many investors choose to invest in an ETF instead.
In South Africa, there are a number of ETF providers that offer a wide range of ETFs to suit different investment objectives and risk profiles. Some of the most popular ETF providers in South Africa include Satrix, 10X, Ashburton, and Sygnia. These providers offer ETFs that track various indices, such as the FTSE/JSE Top 40 Index, the MSCI World Index, and the S&P 500 Index, as well as ETFs that provide exposure to specific sectors or asset classes, such as gold or property for example.
Another advantage of ETFs is that they are highly transparent. Unlike traditional mutual funds, which only disclose their holdings periodically, ETFs disclose their holdings on a daily basis. This allows investors to see exactly what they are investing in allowing them to make informed decisions about their investments.
As explained, ETFs are highly liquid, which means that investors can easily buy and sell shares as needed. This is particularly important in times of market volatility, when investors may need to adjust their portfolio quickly in response to changing market conditions.
In conclusion, ETFs are becoming an increasingly popular investment vehicle in South Africa, thanks to their low cost, transparency, diversification, and liquidity. Investors have access to a wide range of ETFs that track different indices, sectors, and asset classes, and they can use these ETFs to build a diversified portfolio that meets their investment objectives and risk profile. With the continued growth of the South African ETF market, investors can expect to see even more innovation and choice in the years to come.
