What may confuse the novice is that his own financial adviser will invariably promote unit trusts over ETFs whereas investment professionals will suggest the latter. That is because ETFs are designed to be low-cost introductions to the investment market, and their commission structures will most likely not be able to match other investment products.
Spread your risk
Suze Orman, internationally acclaimed personal finance expert, calls ETFs the ‘unit trusts of the 21st century’ as they give ordinary people easy access to the stock exchange.
Brett Landman, joint CEO of Satrix, the originator of the first ETFs in South Africa and one of seven issuers today, says investors should insist on asking for them when consulting with their broker. Better still, you can purchase one directly through your stockbroker, bank or from an issuer such as Satrix.
Leanne Parsons, head of Equities Trading at the Johannesburg Stock Exchange says: “One of the major features of ETFs is that as listed investment products, ETFs allow investors to spread their investment risk by tracking the performance of a basket of shares, bonds or commodities that form part of an index.”
South Africa currently has a range of 36 ETFs on offer, all listed on the JSE and regularly updated through quarterly rebalancing. These ETFs cover a variety of asset classes, thereby allowing an investor the benefit of diversifying their investments across shares, bonds and commodities, and in so doing, reducing their risk or exposure to a single asset class.
Low cost and accessible
Annual ETF costs generally range from 1,5% to 2,5% compared to 4,5% to 11,5% for unit trusts, says Mike Brown, managing director of ETF platform etfSA. He says online brokers are the most cost-effective means of buying.
An investment plan enables the investor to invest a minimum lump sum of R1 000 or via a monthly debit order of about R300, to gain exposure to ETFs. Unlike unit trusts, commission is only paid if you use an adviser instead of investing directly yourself.
The ease with which ETF owners can track the performance of their investment on the JSE website and trade that investment at any time during trading hours makes ETFs accessible to all potential investors and ensures total transparency of price.
How do I invest in an exchange traded product?
Online brokers have easy-to-use websites. For instance, Google PSG Online offers the following simple online registration process:
Step 1: Register online for an ETF investment account and PSG Online web profile.
Step 2: Provide your FICA details, and PSG Online commits to opening your ETF account within 72 hours of receipt of FICA documents.
Step 3: Login to your account. You will use the same username and password chosen when you registered for your web profile in step one.
Step 4: Purchase your ETFs in your investment plan from the investment instruction screen.
What are ETFs?
An ETF is an investment fund traded on stock exchanges. ETFs hold assets such as stocks, commodities or bonds and trade close to the net asset value (NAV) over the course of the day.
An ETF trades daily on stock exchanges during normal trading hours and therefore ETFs can be bought and sold just like regular shares on the stock exchange, so instead of purchasing one share on the stock market you can purchase the performance of the top 40 shares on the JSE with the purchase of a single ETF unit.
What is satrix?
Satrix 40 tracks the FTSE/JSE Top 40 Index. This index constitutes the forty largest companies, by market capitalisation, listed on the JSE.