Exchange Traded Funds or ETFs are listed investment products that track the performance of a group or “basket” of Shares, Bonds or Commodities. Note that these “baskets” are known as indices. An example of an index is the FTSE/JSE Top 40 Index. An ETF can be bought or sold in the same way as an Ordinary Share. Investors save time and money as ETFs enable an investor to invest in a variety of asset classes through a single listed investment product.
ETFs are more or less used by both professional and private investors wishing to gain exposure to different sectors, asset classes, types of Shares, Commodities or Government Bonds. They are the ideal investment vehicle for those who are new to the world of investing. An ETF aims to passively mimic the performance of an overall index, such as the JSE, by tracking the movements of the underlying basket of shares or assets that make up that index.
These instruments differ from actively managed investment products like unit trusts in that they always tend to have very low costs as they do not employ portfolio managers to actively buy and sell shares or other securities. An ETF also incorporates shares or other assets like bonds or commodities on the basis of what their weighting is in the overall index it is tracking.
Notably, ETFs make investing in the markets easier because you don’t have to go out and buy forty separate shares, which can be an onerous and expensive process, or rely on the portfolio manager of a unit trust to do it on your behalf for a fee. Instead you can simply choose the ETF of your liking and it gives you access to the entire index that you wish to track at a very competitive price.
Howbeit, one still has to put extensive thought into which ETF fits their investment goals, just as they would with any other investment vehicle. Even though ETFs may take the strain out of picking individual stocks, investors still have to keep a close eye on the asset allocation of the particular index they are tracking to ensure that it suits their overall investment needs.
Asset allocation is simply the process of allocating securities from different types of asset classes in proportions that suit your investment outcome, timeline and individual risk profile. ETFs that track offshore indexes or asset classes are an ideal way to diversify away from South Africa specific risks, such as sub-par economic growth or domestic political risks.
Internationally-focused ETFs are also a great rand hedge and offer a relatively efficient and cost effective way of shielding your investment portfolio from currency volatility. These global ETFs track international indices and give investors the ability to dip their toes in international markets without having to move their money offshore.
However, it is always advisable to review your ETFs once a year, just as you would with other investments. If you have a tax-free investment account, the best time to do this may be towards the end of the tax year, in preparation for the new tax year.
What is the Best Performing ETF to Invest in South Africa?
There still is not a plethora of funds targeting South Africa or Africa as a whole, but there are more ETF choices. From South African funds to AFK, which targets all South Africa, there are some different ways to give your portfolio access to the region. Therefore, here are some of the most performing ETFs in South Africa.
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EZA targets South Africa by tracking the MSCI South Africa Index, which targets publicly traded securities in the South African equity market. Some of the top holdings include MTN Group, Sasol LTD, and Naspers LTD. Some of the top sectors represented in the fund are Financials, Materials, Telecommunications, and Consumer Discretionary.
Tracks the performance of the top 10 securities, as measured by investable market capitalisation, in the SAPY index, meaning that every counter is given the same weight as the index (100%/10 = 10%) regardless of the market capitalisation.
Note that the purpose of the PrefEx Securities (PrefEx) is to track as closely as possible the FTSE/JSE Preference Share Index. PrefEx provides the price performance of the FTSE/JSE Preference Share Index as well as paying all dividends received from the FTSE/JSE Preference Share constituents quarterly.
AFK – Market Vectors Africa ETF
AFK follows the Dow Jones Africa Titans 50 Index, which focuses on companies that are located in Africa, are listed on the African Stock Exchange or conduct 50 percent of their business in the region. AFK targets a broad range of sectors and African countries, including exposure to some less traditional, frontier markets.
And coupled with holding equities, AFK also uses derivatives such as forwards, futures, swaps and option that help track the correlating index. Some of the top holdings in the fund and index are Nigerian Breweries, Tullow Oil, Attijariwafa Bank, and Orascom Construction.
The Cloud Atlas Big50 ex-SA ETF (AMIB50:SJ)
This is an ETF domiciled in South Africa. The exchange-traded fund invests in 50 representative companies across the African continent, excluding South Africa, through 15 African stock exchanges.
BettaBeta Equally Weighted Top 40
The BettaBeta Equally Weighted Top40 Exchange Traded Fund tracks the performance of the companies in the FTSE/JSE Top 40 index, held in equal proportions of 2.5 percent each, calculated independently by the FTSE/JSE.
GAF – SPDR S&P Emerging Middle East & Africa ETF
GAF targets both Africa and the Middle East by correlating with the S&P Mid-East and Africa BMI Index (STBMMEU). It includes some of the same top holdings as EZA but also includes AngloGold, Impala Platinum, and Firstand. Some of the top sectors represented in the SPDR are Financials, Materials, Telecommunications, and Consumer Discretionary.
Satrix RAFI 40
The Satrix RAFI is an ETF FTSE/JSE index that weights the underlying constituents using four fundamental factors (dividends, cash flow, sales and book value), rather than pure market capitalisation.
The GOVI index tracks the total return version of the South African Bond Total Return Index, an index consisting of bonds issued by the South African government which includes only those issues in which the Department of Finance obliges the primary dealers to make a market and constituting the GOVI index.
The AfricaPalladium ETF is an exchange traded fund incorporated in South Africa. Note that the fund is structured as non-interest bearing debentures that track the performance of the ZAR spot price of palladium.
Exchange-traded funds (ETFs) are a very popular investment choice. ETFs are an affordable way for anyone to invest and get the benefits of diversification and professional money management. And while some of these funds may be attractive, always ensure to conduct thorough research before making any trades. Check the history of the ETF, understand the risks, watch the fund in action and see how it reacts to different market conditions. Also, take a look at what is in the funds as many ETFs may contain derivatives such as futures and options.