Exchange traded funds: a simple & cost-effective way to access the stock market
Exchange traded funds, along with other passive investments, are becoming more popular with South African investors. First launched in SA in 2000, they’ve gained traction in recent years as investors become more cost conscious as a result of muted market returns over the past few years.
The local market
ETFs still make up a much larger portion of the funds invested in markets such as the US than they do in SA however, meaning local investors could be missing out on a cost-effective way to gain overall market exposure.
The argument still exists that developed markets such as the US are more efficient when it comes to pricing, i.e. that the prices of the shares have taken into account all factors, present and future, that may affect the price of that share. Some believe this pricing mechanism to be less efficient in developing markets, such as South Africa, hence the tendency to stick with actively managed funds where managers are able to take advantage of any opportunities presented by the market.
What exactly is an ETF?
Exchange traded funds are similar to unit trusts, but are listed on the stock exchange and they typically track a specific index, although commodity ETFs are also available. Because they are listed on an exchange, the price changes throughout the day (as opposed to a unit trust which has daily pricing) and investors can buy and sell their ETFs throughout the day.
While it may be difficult for a novice investor to select individual shares, any investor can get started by investing in an index (made up of all the shares listed on that index) and will receive the market return, known as beta, minus a cost.
Main benefits of investing via an ETF
ETFs tend to have lower costs than actively managed unit trust investments (although passive unit trusts are also available).
ETFs are highly regulated.
Investors gain exposure to a number of shares in the index via a single investment, without having to research and invest in each single share.
Depending on the index chosen, investors gain access to offshore markets via the JSE.
ETFs are transparent as investors can readily see the underlying companies that make up the index.
When investing via the Glacier platform, any dividends received are automatically re-invested to further enhance the growth of the investment.
ETFs are well regulated
In South Africa ETFs (as well as unit trusts) are governed by the Collective Investment Schemes Control Act (CISCA). Both ETFs and unit trust funds are monitored by independent trustees and are regulated by the Financial Sector Conduct Authority (FSCA).