Exchange Traded Funds (ETFs): Opportunities for Financial Advisors
Recent innovations have made it possible for the general public to own ETFs for as little as R300 per month or with a R1000 lump sum.
Most retail ETFs are public investment funds listed on the Johannesburg Stock Exchange (JSE) and also registered as Collective Investment Schemes by the Financial Services Board (FSB). ETFs track the performance of an index by holding in its portfolio the actual contents (whole shares) of a particular listed index.
Passive management strategy
A recent survey compared actively managed equity based domestic Unit Trust funds to the Satrix 40 ETF. It established that 93,1% of the 436 equity unit trusts available to the public investor, underperformed the Satrix 40 over the past six months, 84,5% underperformed over the past year and a staggering 89,2% of unit trusts underperformed over a five-year period.
One of the key success factors of ETFs is that they employ a passive management strategy where no predictions of the stock market or the economy are made and where no one attempts to distinguish the winning shares from the losing shares (active management strategy).
For instance, the ETF used in the survey (Satrix 40) which tracks the top 40 South African listed companies, makes no determination whether MTN is preferable to Vodacom or Anglo to Billiton since passive management is based on an efficient market hypothesis which states that at all times, markets incorporate and reflect all information, rendering individual share selection, based on some form of forecast of future events futile, and posing the question: “How much of the out-performance of an actively managed Unit Trust fund, vs an ETF fund, is due to skill rather than luck?”
Investors can be certain that ETFs will always deliver the average performance of the market without employing the (expensive) professional skills required to beat the market average which most unit trust funds are mandated to do. The risk profiles of ETFs are therefore also significantly lower by virtue of their passive investment style.
Opportunities for financial advisors
With over 25 ETFs already available to investors from a wide range of leading ETF providers such as Satrix, New Funds (Absa Capital), Bips (RMB), Z - Shares (Investec), db x-trackers (Deutsche Bank), Beta Solutions (Nedbank Capital) and Proptrax, with more on their way, objective financial advice will play a vital role in assisting investors to make informed decisions before investing in one or more low cost, passively managed ETFs to complement their current portfolio of investment products.
In addition, financial advisors will soon be able to offer their clients an alternate, cost effective way to acquire ETFs by utilising the services of a “new breed” financial advisor only ETF investment platform which will launch in July 2010. It is also anticipated that low cost innovations such as Regulation 28 compliant ETF portfolios linked to retirement annuities will be offered soon after the launch.
