If you can’t beat them, join them

Investing in the stock market can be compared to a game of soccer. Thanks to low-cost Exchange Traded Funds, financial advisors can now give their clients a winning strategy.

Consider this scenario. You are a soccer coach. A player approaches you for help - he wants to take on the world’s best soccer team in front of a capacity crowd. There’s one problem. He isn’t part of a team; he is playing on his own.

In essence, this is what investors ask stock brokers and financial advisors to do every day: “Help me take on the stock market and win”.

Approximately R15 billion is traded on the JSE every day. With that much money changing hands, rest assured the sharpest minds are watching, analysing and anticipating every movement of the stock market. Are they going to let your lone player weave through their defences and score a winning goal? Unlikely.

Unit trusts: become part of a team

Unit trusts have become a massive industry, worth about R786 billion, according to Asisa’s Domestic and Foreign CIS Stats Q4 2009.

Unit trusts allow you to place your player in a team (fund) of your choice. There’s a coach (a fund manager), resources and a strategy. Immediately, the odds look better. But victory is not guaranteed.

During a soccer game, teams can score any number of goals. Not so with investing. If one fund scores a goal, the other fund doesn’t stay on zero, it goes a goal down. Score 1: -1. This is the zero-sum game. If one fund is on the winning side of a trade, another is on the losing side.

That’s before costs. After costs, investing becomes a negative sum game. The costs affect the outcome. South African investors will lose out on R24 billion every year, whether the market goes up or down, whether their team wins or loses. Working on an industry size of R786 billion, a 2% expense ratio equates to R15.7 billion in fees. Add another 1% for upfront fees, broker trails, churn and more, and you get to R23.6 billion.

Part of a winning strategy is to minimise the costs of investing.

Low-cost Exchange Traded Funds

In 1975 John Bogle he created the world’s first index fund – a fund that gave investors the returns of the market index, but without the costs of active management. In the 1990s the first Exchange Traded Funds appeared. These are passively managed index funds like Bogle’s, but they trade on the stock market like ordinary shares. Index funds make the market simple. They invest in all the shares in an index.

According to the Financial Times Special Report on Exchange Traded Funds, $1 trillion is invested in ETFs on stock exchanges in 42 countries around the world. South Africa has 25 ETFs.

You will soon be able to access these ETFs via an independent Exchange Traded Fund investment platform dedicated to financial advisors.

The game wins

So here’s the new scenario. An investor comes to you, asking you to point him in the winning direction. Today, thanks to Exchange Traded Funds, you can offer some different advice.

“It’s not about scoring the winning goal. Nor is it about supporting the winning team. Don’t think of the market as your opponent. Instead, make it your ally. An Exchange Traded Fund is the price of entry. Buy a ticket to the stands and enjoy the game.”