Exchange Traded Funds (ETFs) Ever-more options for investors

In contrast to the unit trust industry, where there has been some contraction in the number of products on the market, the number and variety of ETFs are growing, signifying an industry that is in the ascendency, offering investors an ever-growing range o

ETFs are typically Collective Investment Schemes (portfolios of shares or other assets), which are listed and trade like normal securities through stock exchanges. At the beginning of 2011, there were 31 ETFs listed on the JSE and a number of new exchange traded products will soon be introduced.

Exchange Traded Notes (ETNs)

ETNs are securities listed on the JSE and the issuer has a contractual obligation to pay the holder a return linked to, for example, an interest rate, the performance of one or more shares, an exchange rate or a commodity. The investor therefore has to assess the credit risk of the issuer, but the JSE insists that the credit risk is underwritten by a AA rated bank or financial institution.

While the credit risk and the type of assets tracked can add an additional element of risk, the unique nature of such ETNs adds considerably to the investment choice in South Africa. Listed and traded on the JSE, these products offer the only way for South African investors to gain rand exposure to the global physical markets in commodities. In addition, the issuers provide market making liquidity and TERs are typically around 0,5% per annum. ETNs now trade on the JSE for gold, platinum, palladium and silver futures (Standard Bank Commodity-Linkers); and oil and coal futures (Rand Merchant Bank – BIPS).

Africa Investments

A new ETN, based on an index of 179 shares listed on 29 African and international stock exchanges, was launched in mid-May. The Africa Equity Index ETN is issued by Standard Bank and has a TER of 1% per annum. Nedbank Capital, through its BettaBeta CIS license is also looking at issuing ETNs on African mining shares and other African portfolios.

Asset Allocation Funds

Capitalising on the current popularity of asset allocation and balanced funds, Absa Capital launched two NewFunds MAPPS ETFs in May. The MAPPS Growth ETF allocates 75% to local equities, 10% each to Government bonds and inflation-linked bonds, and 5% to cash; while the MAPPS Protect ETF has an asset allocation weighting of 40% in equities, 15% in Government bonds, 35% inflation-linked bonds and 10% in cash. These products have a sliding scale management fee structure, depending on the size of the investment, but the maximum fee paid is 0,8% per annum, making the MAPPS ETFs somewhat cheaper than comparable asset allocation funds issued by unit trust companies.

Property Funds

The Proptrax ETF, which tracks a basket of the 16 major listed property companies on the JSE, was joined in late-May by the Proptrax Ten ETF, which tracks an index of the largest ten property companies on the JSE. The first Proptrax ETF was market capitalisation weighted, which led to some concentration of the portfolio into a few bigger property companies.

The Proptrax Ten ETF, however, equally weights funds allocation into the ten property companies in the portfolio, thereby reducing concentration risk and enhancing liquidity.