Be aware of ETFs in 2013

This suggests that there is an increasing demand for these passively managed low cost unit trusts, which track equity, bond, property and tradable cash indices. And, in general, ETFs are far cheaper than their close cousins, the actively managed unit trust.

ETFs can cost as little as 0.10% (TER). Low costs are the reason why many ETFs manage to outperform most actively managed unit trusts, proving that low cost products are not related to low returns, and that actively managed funds don't necessarily mean the best returns.

According to Morningstar, only 24.36% of South African actively managed general equity unit trusts beat the Top 40 Index over the past three years. It is also worth noticing that the average TER for an actively managed general equity unit trust is around 1.8%, which is in stark contrast to the average ETF TERs of 0.45%.

It is this type of important information, thanks to the growing support of ETFs by South Africa’s media machine that is driving the increasing popularity, and demand for of ETFs by investors.

Nowadays, investors are better informed about ETFs than they ever were, and it is expected that more and more investors will start looking at the value that other indices can offer them, as opposed to just the traditional Top 40 Index.

The table below, for instance examines three other great indices to invest in. It is interesting to note that most of the actively managed funds that use these indices as benchmarks, failed to out-perform their benchmarks. Incredibly, no actively managed fund which benchmarks the FTSE/ Dividend Plus index beat the index.

ETFs in South Africa still remain relatively unknown when compared to traditional actively managed unit trusts, mostly because, even though investors may know about ETFs, most investors don’t know where to buy ETFs.

Few South African investment platforms have embraced ETFs, mainly due to their lack of system capabilities and ETF administration expertise, but also due to the fact that in a lot of instances, platforms have a better chance at generating more fees by selling products with higher costs. All these factors contribute to why many South Africans don’t know about these passively managed, low cost, high performance ETFs.

The big challenge for ETFs in 2013 is increasing its levels of awareness with financial advisors who still remain ETFs best opportunity when it comes to exposing investors to the benefits of investing in ETFs.

It is expected that as more financial advisors embrace ETFs in their pursuit for less expensive saving products for their clients in a low return environment, that demand for ETFs will increase. A good example of this is where the Absa Capital New Funds eRafi (a general equity passively managed ETF) returned 14.89% over a three year period with a TER of 0.10% vs. one of South Africa’s best known general equity unit trusts which returned slightly more at 15.17 %, at a significantly higher TER of 1.14%, over the same period.

Understanding this information should raise the question in many an investors mind "What do I pay my fund manager for?”

Globally, ETFs remain the fastest growing investment product with assets reaching a record new high of $1.86tn as at the end of September. This represents market growth of 21.7% year to date.