Exchange traded funds
An exchange traded fund or ETF, tracks or mimics an index, it holds the same instruments as the underlying index. It gives easy access to selecting a diverse range of investments in bonds and commodities and markets – both locally and globally – it’s simple.
An ETF is an Exchange Traded Fund. This is a fund that tracks a market index or a commodity (like gold or oil) or a basket of assets (for example a sector). ETFs are traded like a stock on an exchange and their prices change throughout the day as they are bought and sold.
As an ETF is like a stock bought and sold on an exchange, you will need a brokerage account and to buy and sell through a broker. There may be a commission charge for trading in ETFs. You can contact Standard Bank Online Share Trading on www.securities.standardbank.co.za/ost/ or on 0860 121 161 (+27 11 415 5000 international)
Exchange Traded Funds (ETFs) are open-ended collective investment schemes that are listed on stock exchanges. They differ from unit trusts in the following way: ETFs can be bought and sold throughout the day on a stock exchange, like an ordinary share, through brokers or financial advisers during normal trading hours. Unit Trusts are traditional collective investment schemes that are priced once a day and units are bought and sold from the investment management company.
1nvest has a range of ETFs and UTs, covering various indices in local and global markets. ETFs are popular among both institutional and individual investors because of their diverse applications in building portfolios and controlling costs and risk.
Index investing is called ‘passive investing’ as the fund managers of index funds simply buy exposure to the stocks in the market index, a basket of stocks with the largest companies by market capitalisation receiving the largest weights. Examples of market indices are the FTSE/JSE Africa Top 40 index and the FTSE/JSE Africa All Share index. Index tracking funds tend to charge low fees and portfolios earn market returns rather than attempting to outperform the market.
We believe that index tracking strategies should be considered by all investors that seek simplicity, lower investment costs and diversification.
Investors who seek market returns through a simple, transparent and low-cost solution can invest in an index product that meets their financial goals. The cost of managing an index fund is much lower than an active fund, resulting in index investments usually having lower total expense ratios. Over time this fee differential can equate to considerable differences in asset value growth.
Investors who seek diversification from specialised investment products can invest in an index product to reduce total investment risk. Specialised products can include concentrated holdings in individual securities, active manager funds, factor or smart beta strategies, and ETFs that invest in narrow segments of the market. By allocating a portion of their assets in an index tracking solution, investors can reduce their total active risk i.e. the risk that they will underperform the market index. In doing so they will also reduce their total investment costs as index tracking investments usually have much lower costs than other investment products.
Index funds aim to track the performance of an index. An index represents a basket of securities with the amount of each security in the fund weighted as it is in the index. Index funds benefit investors as they are simple to use, transparent, flexible and offer low cost diversification.
The development of the world’s economies and interconnectedness of its markets have made it attractive to invest a portion of a portfolio in global funds. High returns are not always found in local markets. Global funds offer investors the opportunity to invest in the fastest areas of economic growth and earn diversified returns in global currencies. 1nvest global funds are low cost vehicles that offer access to global markets in a single fund. Local investors do not need to be experts in global securities or pay high costs to benefit from global investment returns.
Yes. Active and passive strategies are complementary as finding the right balance between the two strategies can help lower total costs and reduce overall investment risk. Investors with a blend of both active and passive investments have the opportunity to outperform the market index and reduce their total active risk i.e. the risk that they will underperform the market. In doing so they will also reduce their total investment costs as index tracking investments tend to have much lower costs than other investment products.
For an investment to be risk free, the assets of the investment need to have a certain future return. All financials assets therefore carry some risk. An index tracking product that tracks the market will have exposure to market risk. Index tracking products that track factors (like Value, Momentum, Quality and Low Volatility) will have exposure to their respective factor risks, i.e. that the risk that a particular factor is out of favour in the market.
The returns of index tracking products are not guaranteed. The aim of an index tracking product is to replicate the performance of an index, example the market. When selecting a suitable index fund, investors should not only look at the investment fees charged, but also take into consideration the track record of the passive manager in replicating the returns of the index.
ETFs are listed on the JSE and can be traded at any time during market hours. The liquidity of an ETF does not depend on its trading volume. Instead, an ETF’s liquidity is determined by the liquidity of its underlying securities. This is because of the way in which ETFs are created and redeemed by market participants in response to demand for ETFs. As demand for ETFs increases, the market participants create more ETFs from the securities featured in an ETF’s benchmark index. As demand decreases, ETFs are redeemed. This ensures continual access to some of the world’s largest securities. ETFs remain highly liquid provided the underlying securities required to build them are liquid. The underlying basket of securities of 1nvest ETFs is chosen for their high liquidity characteristics.
The funds are designed to produce returns in line with the returns of their benchmark indices. However, all index funds experience a small degree of tracking error – which is the difference between the fund return and the index return. The main causes of the tracking error are: Fees – The lower the annual management fee drawn from the fund, the lower the impact on tracking error. 1nvest funds have a low annual management fees relative to traditional funds. Trading costs – The lower the trading costs of the fund, the lower the impact on tracking error. 1nvest funds have low levels of trading relative to active funds. Timing of pricing – If the funds are priced at a different time of day to the benchmark index, there will be a difference in return. Income and dividend distributions that are reinvested can increase the value of the investments.
The tracking error measures the efficiency that an ETF or a Unit Trust achieves its investment objective of tracking the underlying index. The lower the tracking error, the closer the performance of the ETF is to that of the underlying index.