As 2017 rapidly draws to a close, you may be looking to invest a well-earned annual bonus to pad your nest egg for the future. And in today’s tumultuous times, savvy investors should definitely consider choosing an Exchange-Traded Fund or ETF says Jordan Weir, an equities trader at wealth management and investment firm Bayhill Capital.
An ETF is a type of Collective Investment Scheme (CIS) that trades like a common share or equity on a stock exchange such as the Johannesburg Stock Exchange (JSE). Unlike purchasing individual shares of companies, ETFs track or replicate an index, offering investors cost-effective exposure to a wide variety of stocks.
“The Satrix Top 40 ETF, for example, tracks the exact shares and allocations of the FTSE/JSE Top 40 Index. Investors who purchase shares in this ETF then receive exposure to the entire index within a single trade as opposed to buying each individual Top 40 stock separately, incurring 40 different trades and 40 times the amount of brokerage costs,” he explains. “Global ETFs purchased with your offshore investment allowance, or locally, via the listed CoreShares S&P 500 Exchange Traded Fund or Satrix MSCI World ETF, are also a really cost effective way to get global diversification and exposure.”
ETFs are considered passive investments, mirroring markets with the general aim of consistently delivering benchmark returns. The cost of investment is consequently usually much lower than actively managed unit trust portfolios where an asset manager determines the final asset allocation.
While still relatively new to South Africa, the ETF market has seen swift expansion in the past few years, growing from just 48 listed funds at the start of 2017 to 58 listed funds by early December.
This expansion has meant an increasingly diverse range of ETFs are on offer to local investors, which track indices specialising in a variety of regions, asset classes such as bonds or property, and sectors such as financials or industrials.
He notes that with a local economy under pressure, ETFs currently offer South African investors an especially appealing alternative for achieving offshore exposure.
“Investors seeking offshore exposure could particularly look to global ETFs now, with a growing interest possibly in the European and emerging market regions in the next few years.”
Choosing the right ETF
Weir states that you should carefully review your individual financial goals and risk appetite before investing, as well as research the underlying stocks of ETFs you are considering.
“A good general rule for investing is to ask yourself whether you understand the companies or products in which you are investing your hard-earned capital. If not, don’t invest your money in it.”
He adds that your investment time horizon is also important, as investments in ETFs are generally considered long-term investments that should be held for periods of five years or longer to enjoy the full power of the compounding effect.
Finally, before investing consider the Total Expense Ratio (TER) of the fund, which expresses the total costs paid by the fund for management and operating expenses. These costs generally range from 0.15% and 0.95%, averaging around 0.43%. You can also expect to pay transaction costs which will include commission, brokerage and account administration expenses.
Before selecting an offshore ETF however, Weir cautions that money invested in ETFs with shares registered in regions such as the United Kingdom or United States may be subject to situs or estate duty taxes, which could be as much as 40% of the value of the shares.
Investors seeking to invest in offshore ETFs should therefore consult a professional adviser to ensure that they are invested appropriately and tax efficiently.