2010 has seen a sharp increase in interest around ETFs from investors, financial advisors and the media, and for numerous good reasons.
One of the key factors driving the interest in Exchange Traded Funds (ETFs) is the fact that ETFs employ a passive management strategy which involves little intervention by an asset manager, save for making minor adjustments to the fund from time to time which may be caused by events such as a company merger, thus altering the make up of the index.
Passive style
No predictions of the stock market or the economy are made, nor are there any attempts to distinguish the winning shares from the losing shares.
Virtually all ETFs seek to closely replicate an index’s performance by simply tracking its return. An index is a statistical measure of a compilation of several shares i.e. the FTSE/JSE Top 40 Companies Index which tracks the performance of the top forty companies listed on the Johannesburg Stock Exchange.
Investments made by ETFs are determined by the price of the index they track, ensuring that ETFs deliver the average performance of the market. In simple terms, ETFs don't try to beat the market; they are the market.
Lower risk
The risk profiles of ETFs are also, in most cases, significantly lower by virtue of their passive investment style.
Like unit trusts, most ETFs are also registered collective investment schemes that offer investors a proportionate share in a professionally managed portfolio of securities.
New developments
The recent launch of the first independent ETF investment platform for financial advisors further reflects the growing popularity of ETFs.
It is also anticipated that innovations such as Regulation 28-compliant ETF portfolios linked to retirement annuities will appear on the market during 2011. This will provide financial advisors with a set of new and innovative retirement products to assist their clients to attain wealth.
More choice
Listed ETFs 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, are already available. 2011 will see even more ETFs list on the JSE.
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.
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