The need for ETF’s driven by a volatile world economy

An ETF is a financial instrument that is listed on, and trades, through the JSE (Johannesburg Stock Exchange) just like a share does, but instead of tracking the performance of a single share, it can closely track a whole range of shares.

 

ETFs make the business of getting exposure to an industry or sector simple and easy, because instead of having to buy 15 different shares to get exposure to the financial sector, you buy just one share (such as the Satrix FINI)which tracks the FTSE/JSE financial sector index. The benefits that single share owners enjoy, primarily dividends and interest, also accrue to owners of the "multiple shares in one fund” approach of ETFs.

ETF product providers and asset managers such as Absa Capital, Deutsche Bank, Nedbank Capital, Grindrod Bank (Proptrax), Satrix and Stanlib, to mention some, have provided the South African market with almost 40 ETFs since 2002.

Innovation abounds in the South African ETF industry and investors can choose "smart” ETFs like BGreen ETF from Nedbank, the eRAFI Overall from Absa Capital, the top performing Satrix DIVI tracking the FTSE/JSE DIVI+ index, inflation linked bond index ETFs and even a three-month cash ETF. The top managed fund of 2012 was the Investec Emerging Companies Fund class R, which returned 40.71% in the 12 months to December. Both the Satrix INDI and NewFunds eRAFI SA Financial 15 topped that number 1.

This means that the Satrix INDI portfolio also outstripped every managed industrial sector unit trust. The best of those was the Stanlib Industrial Fund, which delivered a total return of 37.54%. That made it the fourth best managed unit trust fund in the country, even though it under-performed its benchmark index by around 5% 2.

With the wide variety and excellent liquidity of ETFs it makes perfect sense to combine ETFs into portfolios. The obvious problem is how to optimally create such a portfolio and at the same time address one of the most fundamental concerns that most financial advisors and their clients share risk.

In addressing this concern let us first look at the risks involved in owning a single ETF. ETFs fall under the collective investment schemes act and so the investor’s assets are protected in terms of the Collective Investment Schemes Act (CISCA). Add to that the fact that an ETF merely tracks its specific index there is thus little asset-manager induced risk (since the ETF merely follows the performance of the index, no more, no less, with a small tracking percentage error (nothing in this world being perfect of course).

In addressing the issues of market risk, each ETF tracks the risk of its specific index, be it the Top-40 or any similar equity index on the left hand side of the risk spectrum, to the medium risk type ETFs that track listed property shares, to the various bond-index tracking ETFs which have lower risk performance and ending right down at the right hand side of the risk scale with the cash-like (almost zero) risk of the TRACI 3 Month ETF from Absa Capital.

It is likely that the future will soon see a wealth of new ETFs and ETF portfolio products at steadily lowering fees standing as excellent alternatives to the higher and sometimes exorbitant fees of the active asset managers. "A big exchange traded product trend in Europe, the Middle East and Africa over the next two years will be a move into the retail space through advisors” according Stephen Cohen, MD at iShares, part of Blackrock Investments.

Refrences:

1Source - Money Web.

2Source - Money Web.