First, it is useful to highlight the very opposite of a liquid asset. Houses, pensions, art and jewellery would all be considered highly illiquid. Turning these assets into cash takes time, risk and effort. It attracts high transaction costs. Working out a good price is difficult, too. ETFs differ from these in important ways.
One way ETFs differ from these illiquid assets is that they trade on a stock exchange – in our case, the Johannesburg Stock Exchange (JSE). Just like any company share, an ETF follows a legislated process to become a tradable asset. The difference between a company share and an ETF is simply that the ETF functions as a wrapper that holds several assets – including shares, government bonds and even cash.
The result is that ETFs are bought and sold whenever markets are open. That means individual DIY investors can go online and make an offer to sell ETFs at a given price or make a bid to buy ETFs at a given price.
This is where the second important differentiator comes in: market makers. These are institutions that hold substantial amounts of cash and a large number of ETFs, and help to create an efficient market by buying and selling ETFs.
Market makers have the technology and systems to pick up on offers to sell and bids to buy – just like those you put into your trading platform or like a large financial services company may do at scale. The market maker assesses these bids and offers, and then buys and sells accordingly, based on their evaluation of how attractive the prices are.
Of course, ETFs aren’t speculative assets that are expected to display large price swings in short periods of time. So the bids and offers tend to be very close to the quoted prices on the JSE. Market makers are sophisticated investors who trade on these small margins.
The result is that, while selling your house may take weeks, months or even years, holders of ETFs have great confidence that they can sell their ETFs rapidly at the price quoted live on the stock exchange, or at a price that’s very close to it.
Collective Investment Schemes (CIS) are generally medium- to long-term investments. The value of participatory interests may go down as well as up. Past performance is not necessarily a guide to future performance. CIS are traded at ruling prices and can engage in borrowing and scrip lending. A schedule of fees and maximum commissions is available on request from the manager. The manager does not provide any guarantee with respect to the capital or the return of a CIS portfolio. These portfolios are third-party-named incubator portfolios. The manager retains full legal responsibility for these portfolios.
1nvest Fund Managers (Pty) Ltd is an authorised financial services provider (FSP), FSP No. 49955, under the Financial Advisory and Intermediary Services Act (FAIS), Act No. 37 of 2002. The manager of the Schemes is STANLIB Collective Investments (RF) Pty Ltd and registered in terms of CISCA. For the basis and information on awards and rankings, please contact [email protected].
