This year sees the 20th anniversary of exchange traded funds (ETFs) introduced to the JSE. The popularity of ETFs continues to grow for several reasons. They are simple to understand, flexible, affordable and they offer diversified exposure. The diversification and subsequent risk reduction of this investment option makes it particularly attractive for first-time investors.
An ETF is a bundle of securities that are traded on the stock exchange. It is a mixture of underlying assets and can include shares, commodities and bonds thus offering the retail investor access to a variety of relatively low-risk opportunities. An ETF is a good option to harness the potential of the stock market. With each fund varying in investment objectives as well as risk and return profiles, an investor is able to create a balanced portfolio, using a mixture of equity, property, gold and fixed income ETFs.
“In today’s volatile economic environment, trading instruments such as ETFs offer certain reassurance to the investing process for first time investors. The diversification benefit of ETFs, its simplicity, liquidity, transparency and its building block advantage in a single instrument - all aids in low cost investment decision making,” explains Adèle Hattingh, Manager of Business Development and Exchange Traded Products (ETP) Primary Markets, at the JSE.
As Africa’s largest stock exchange, the JSE currently trades on average approximately R600m in ETF value daily, reflecting a well-established industry that has a market capitalisation of close to R100bn from eight different ETF issuers across South Africa.
Hattingh adds, “We are seeing ETFs continue to present as an attractive investment option for many reasons.”
Invest with the end in mind
“Long-term investing has become more attractive because ETFs have the added benefit of being tax-free, when using a Tax-Free Savings Account (TFSA). The announcement made by the National Treasury’s introduction of TFSAs in March 2015 and the associated tax benefits of the account has contributed in creating greater awareness of ETFs,” says Hattingh. Being a savvy investor means you may be putting money away for your child’s education, a down payment for a home or for your golden years – ETFs’ simplicity and accessibility can help investors to achieve specific financial goals.
Simplicity
The simplicity and convenience of ETFs have made them more accessible to the consumer. You can contact a stockbroker, a financial service provider or approach an ETF provider directly. What adds to the simplicity of an ETF is that you can buy and sell them daily, just as you would a share, which is an advantage in a volatile market.
Diversity
ETFs are known for offering investors a diversified set of securities, such as stocks at a low cost, allowing investors access to many areas of the local or global market. Markets will fluctuate and ETFs are not immune to this. However, the diversification benefit at least helps to temper significant market swings.
Evolution of ETFs
When launched in 2000, the JSE’s ETF industry focused on traditional local and global vanilla equity ETFs and precious metals such as gold. ETF investment strategies then shifted from traditional broad-based equity market indices to other asset classes as well. Today, ETFs range from broad market equity exposure, local and global debt, property, precious metals, Africa equity ETFs and Smart Beta ETFs. To date, the JSE offers close to 30 SA equity ETFs, 17 international equity ETFs, 2 Africa (ex-SA) equity ETFs, 8 commodity based ETFs, 11 local and global bond ETFs, 1 money market ETF, 2 multi-asset class ETFs and 6 local and global property ETFs.
“ETFs are ideal for first time investors. Anyone looking to start investing can open a stockbroker account with an authorised JSE Equity member or open an investment plan with an ETF provider. This way, they can easily buy ETFs using a monthly debit order or a single lump sum investment,” says Hattingh.