Exchange Traded Funds (ETFs): Stock market trading - with less risk
Investing in ETFs has proved a popular choice for many new and seasoned investors wanting to minimise the risk of investing on the stock market.
Suze Orman, internationally acclaimed personal finance expert, has called ETFs the ‘unit trusts of the 21st century’ as they give ordinary people easy access to the stock exchange.
South Africa currently has a range of ETFs on offer, all listed on the JSE and regularly updated through quarterly rebalancing.
ETF options
• Equity ETFs (such as the Satrix 40 which tracks the top 40 companies on the FTSE/JSE Top 40 Index)
• International Equity ETFs (such as dbx-trackers MSCI World Index that comprises approximately 1900 companies in 23 countries of the developed world)
• Dividend ETFs (such as Satrix Divi that tracks the 30 companies from the JSE Top 40 and Mid-Cap indices that are expected to pay the best normal dividends over the forthcoming year)
• Bond ETFs (such as Zshares GOVI that comprises South African Government Bonds)
• Property ETFs (such as Proptrax that consists of the top 16 listed property and property loan stock companies listed on the JSE)
• Commodity ETFs (such as NewGold which tracks the rand price of gold and enables investments in a listed instrument)
• Currency ETFs (such as NewRand that comprises 10 South African shares with the closest correlation to the Rand/Dollar exchange rate over the previous two and a half years)
Spreading investment risk
As listed investment products covering a variety of asset classes, these ETFs allow investors to spread their investment risk by diversifying their investments across shares, bonds and commodities. In addition to reducing exposure to a single asset class, investors also gain broader market or sector exposure.
Simplicity
Purchasing a portfolio of shares rather than a single share eliminates the necessity for investors to conduct research on numerous companies.
Investors also have peace of mind knowing that their interests are protected by both the JSE and the Financial Services Board, since most ETFs are classified as a registered Collective Investment Scheme and are regulated as such.
ETFs can be purchased through a stockbroker, the particular ETF provider’s investment plan or investor platforms which also offer investment plans. An investment plan enables the investor to invest a minimum lump sum of R1000 or via a monthly debit order of about R300. Every ETF security purchased is registered in the name of the investor on the JSE/STRATE electronic share register.
The ease with which ETF owners can track the performance of their investment and trade that investment at any time during trading hours makes ETFs accessible to all potential investors. ETF prices can be viewed on the JSE website, at a 15 minute interval.
Cost structure
Because ETFs are passive investment vehicles and do not require the expertise of fund managers, they have lower cost structures than unit trusts. Commission is only paid if an investor uses an advisor, instead of investing directly.
All ETFs are exempt from Securities Transfer Tax (STT) upon purchase, although the sale of an ETF is subject to Capital Gains Tax.
ETF owners may receive dividends on a quarterly or semi annual basis although the investor may also, in some instances, elect to have the dividends reinvested in their portfolio of ETFs.
Ultimately, ETFs allow investors to have minute-by-minute control of their diversified investment at relatively low cost - an attractive investment option for new and seasoned stock market investors.
