Exchange Traded Funds

Exchange Traded Funds (ETFs) arrived on the JSE in late 2000, so they're relatively new but an excellent and simple way to gain exposure to the JSE. A lot of investors want to invest on the JSE but find the ‘do-it–yourself’ (DIY) route too time consuming

Nico-Louis Minnie, an investment specialist at Liberty, explains that an ETF is similar to a unit trust except you can trade it. When trading ETFs there are no contracts involved when either buying or selling and it is typically a cheaper option when looking to invest in as there are little or no fees. ETFs are traded on the Johannesburg Stock Exchange (JSE) which means that trading is direct and because an ETF merely tracks the market’s performance (i.e. the objective of an ETF is to replicate the performance of the benchmark) the likelihood of an ETF to perform against the market is relatively high.

So an ETF such as the Stanlib40 merely aims to track the Top40 index and it does this by buying all the shares that make up the Top40 index and therefore perfectly replicates the market performance. This is important as it means that the only risk you have is market risk, as the ETF issuer has psychically bought the shares and ring-fenced them.

Minnie points out that the Top40 index is made up of, "the 40 largest companies on the JSE, based on its market capitalisation. Market capitalisation is the value of all the shares that the company has issued". In other words by simply buying this one ETF, you get exposure to the 40 largest companies on the JSE across different industries (e.g. retail, mining, property, banking, luxury goods, insurance and so the list goes on).

From a single ETF, you get diversification, cheap entry into the market and overall market performance. Sure, the market performance has not been that hot, however, it remains the best place for the average investor to be invested over time. Over the last couple of years we have also seen a number of more niche ETFs coming to the market. So one is able to invest in high dividend yielding stocks via the Satrix Divi, or financial stocks via one of the ETFs that track the Fini15 index (the index of the largest 15 financial stocks on the JSE) or even a property ETF.

As mentioned, these ETFs are traded on the JSE, ensuring protection and transparency, but you are able to buy them directly from the ETF issuer (monthly debit order or by lump sum investment) and for smaller investment amounts the costs will still be cheaper than buying via your stock broker.

A last important point to mention is time: ETFs are like any other investment vehicle and must be bought with time on your side. They're not about getting rich quickly but rather about creating wealth over time.