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Accessing offshore markets through ETFs

14 September 2021 Wehmeyer Ferreira, Executive Director at 1nvest

Given that South Africa’s equity market is fairly small compared to global standards, few can deny the argument for investing offshore. For some, it is about building a defence against the lacklustre local economy while for others, investing offshore may be about incorporating a balanced approach into one’s portfolio.

Most balanced funds that South Africans can buy into are Regulation 28 compliant, which is the pension fund regulation that determines what assets you can invest in and how much money you can take offshore – currently limited to 30%. For a lot of people, that is too little, and they seek additional offshore exposure.

There are two broad ways of doing this: either by converting Rands into foreign currency (for example US dollars) and depositing those funds into a foreign bank account, or by buying into offshore investment vehicles such as shares, offshore mutual funds or offshore exchange traded funds (ETFs).

Those who take physical cash offshore will need to get tax clearance from SARS first. The limit for individuals externalising physical cash sits at R10 million, however you can take R1 million out as part of your travel allowance, which does not require tax clearance.

It is important to note that taking physical cash offshore can be an admin intensive process and fees associated can eat into the sum of money that you have to work with. The conversion of those funds into foreign currency will attract forex spreads, and the opening of an offshore bank account comes with fees, including the brokerage or platform fee. All the fees and slippage add up.

The benefits of going global with ETFs

An alternative for South Africans is to buy into an instrument locally that provides the type of offshore exposure that they may be seeking. Most of these instruments are set up as feeder funds: either unit trust funds or ETFs.

This route is both cost efficient and less admin intensive compared to taking your money offshore directly. The local fund is priced in Rands, which omits the need for tax clearance and these vehicles can be easily bought into via a traditional broker or online platform.

It is no secret that South Africa’s economy has been struggling over the last decade. Further to that, the local equity market lacks depth in terms of sector exposure. Those who are looking for technology or oil and gas sector exposure for example really only have one or two options to work with. Whereas going beyond SA shores, the options are endless.

This does however present a conundrum for the South African investor going global: with so many options available, where do you begin? In South Africa, there are around 1600 unit trusts to choose from. And if you decide to go with an offshore fund manager, the options become endless.

That is why index tracking product can be an attractive route for going offshore because investors don’t need to overthink or monitor the fund manager or worry about underperformance. What you are going to get through a tracker is exactly what that benchmark index returns offshore. Investors can get additional sector exposure and exposure to other economies that drive stock market returns by investing in a single ETF. The MSCI World, for example, which is index that tracks the developed market, includes around 1600 constituents and around 60% of those companies reside in the US.

Get broad exposure to offshore markets without the effort

But the reality is that many US listed companies derive less than 50% of their revenue from that region. They may be listed in the US but actually have exposure to global and emerging market economies. Apple’s sales in the US for example make up less than 50% of the tech company’s sales globally, as demand for its products grow elsewhere such as in China and across the African continent.

That said, one of the best ways for local investors to achieve broad based global exposure without having to think about which country, currency or sector to select is to then buy the MSCI World Index via a feeder fund or ETF.

There are however more niche products available to investors who have a specific view that they wish to express. Let’s say that you are not confident in the European economy, or don’t understand Asia, and only want US exposure, then you might want to consider an S&P 500 index tracking fund, which will give you exposure only to the US.

It may be that you want to express that view even further. Standard Bank’s specialist index tracking provider 1nvest has an S&P 500 Info Tech fund, for example, which gives investors exposure only to technology companies in the US. So, if you are a millennial tech junkie and believe that tech will only become more integrated in our society in the years to come, then this fund may not be a bad place to be long term.

The point is that there are various views one can take with global investing through ETFs. There is the buy and forget view of going into the likes of a broad index like the MSCI World but there is also the view of considering your preferences as an individual and aligning your investments to those beliefs and preferences.

A cost-effective offshore investment

One of the key benefits of ETFs is that they are cost effective. In an actively managed fund, a whole floor of analysts looks at stocks to come up with a view and those managers need to be paid. This is not to say that there isn’t a place for both passive and active in an individual’s portfolio.

Essentially, an ETF tracks an index, which means it is a fairly cost-effective implementation mechanism. South African investors can buy the 1nvest MSCI World ETF, which is listed on the JSE, and pay a full product fee of about 0.4% per annum. There will of course be other costs associated, which will depend on your broker’s fee or the platform fee.

South Africans can purchase ETFs through their physical stockbroker or online via share trading platforms like Standard Bank’s Online Share Trading platform that provides a DIY way of an investing.

In this case, investors need to determine the reasons behind what they are buying. If you are investing for something specific, you need to make sure that the ETF that you buy is appropriate for that something you are investing for. If you are speculating or trading to express a view on what is happening globally, you do need to go in with your eyes wide open because it does come with risks.

Quick Polls

QUESTION

South Africa’s Financial Sector Conduct Authority (FSCA) has the power to raise revenues by issuing administrative penalties and fines against non-compliant financial services providers, with this money flowing back to the Treasury… Does this, in your view, create a regulatory / government conflict of interest?

ANSWER

Absolutely, as conflicted as it gets
Maybe, I’m on the fence on this
No, the FSCA can do no wrong
The guilty must pay
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