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Nerina Visser from etfSA on Exchange Traded Funds (ETFs)

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Nerina Visser from etfSA on Exchange Traded Funds (ETFs)

Published Date: 2018-05-23 | Source: Sponsored | Author: Stephen Gunnion

Nerina Visser from etfSA on Exchange Traded Funds (ETFs)

Close to R85 billion is now invested in exchange-traded funds (ETFs) listed on the JSE as South Africans wake up to these cost-effective investments. What's the attraction and how can you make the most of your ETF investment? Stephen Gunnion spoke to Nerina Visser, a director at etfSA and one of the doyens of ETFs in South Africa. She's an expert and a big fan of ETFs and believes they should form part of any investor's portfolio.



Stephen: Why ETFs? What's the attraction for investors?

Nerina: Back in 1965 the unit trust was first introduced to the South African investor and I often think of ETFs as the unit trust for the 21st century. It's the same benefits that you get with a unit trust, which is the package deal, buying a whole load of securities in one diversified basket. But the benefit of the exchange-traded fund specifically is that these units are listed on the stock exchange and therefore you get the benefit of the electronic share register, intraday trading as the prices of the underlying shares change so the value of the ETF changes in line with that so you get that full benefit that a unit trust would give you but with the added benefit of a listing. And of course, because most ETFs are also index-tracking products it really just means that you have lovely transparency in terms of what the underlying investment is all about because it follows typically a well-known and well-publicised index.

Stephen: Are ETFs for everybody Nerina?

Nerina: Stephen, I absolutely think that they are. Because you get many types of ETFs, from really low-cost vanilla straightforward ETFs to some quite exotic products out there, there's really such a comprehensive range of ETFs that are available and I think that if one still sees an ETF only as a way to get exposure to the large cap shares of the overall market and think that it's only along those lines then you've been left behind to a large extent I think because ETFs and the underlying indices that they've tracked have developed to such an extent that there's now anything from direct commodity ETFs to inflation-linked bonds to very exotic so-called smart-beta products and a full range in between so I do believe that ETFs are really an investment for everyone but it's certainly not a homogenous investment universe. One really needs to understand the different types of ETFs and what you are choosing and getting involved in so it's not just a case of jumping in on the one side and thinking that you'll necessarily pick the right ETF for your investment requirements.

Stephen: Would you suggest consulting a financial adviser in that case?

Nerina: I do think that it's worthwhile. Certainly one can put together a very simple portfolio of well-diversified ETFs without a lot of knowledge or insight but I certainly would suggest that if one has very specific investment goals that it is worthwhile speaking to a financial adviser but definitely then a financial adviser who actually knows and understands ETFs. You might find that your traditional financial adviser who might not be that familiar with ETFs may not be the best person to give you advice on it. Fortunately, there's a lot of information available online also and for anyone prepared to do a bit of homework, read up on these, look at what's available, there's certainly a lot of guidance online that one can use to help you with investments in ETFs.

Stephen: If you want to go it alone, how do you invest in ETFs?

Nerina: The first step really would be to say what are your investment requirements. This is not a case of there's one size that fits all in terms of the ETF so I guess the two most important questions there would be your overall investment goals, your investment requirement from this particular investment and then to look at the different types of accounts that one can have, or "wrappers" as they are often also called which each come with their own tax benefits and potential restrictions. So here I'm thinking specifically of the differences between tax-free investment accounts versus ordinary discretionary investment accounts, or then, of course, some of your retirement savings accounts. One cannot buy a retirement or tax-free ETF but you can open a tax-free account into which you buy ETFs. So to come back to your decision on how you actually make a decision around it you need to understand what is your time horizon; how much money have available to invest; is this something you'd be doing as a lump-sum investment or are you going to make regular monthly recurring investments, something for which ETFs are really suited, and then to think in terms of is this about retirement funding, is it tax free, is it discretionary and what role does this really play in the rest of my asset base. You can see that one can do something quite simple and straightforward in, for example, a tax-free investment but you could also really use ETFs well with the assistance of a financial adviser to use ETFs very specifically in your investment portfolio to get a very direct exposure that you would be looking for.

Stephen: Can you buy them at your bank or are there other platforms where you can buy ETFs?

Nerina: Because ETFs are exchange-traded funds, meaning that they are listed on the stock exchange, it means that one necessarily has to buy them somewhere in the value chain through a stockbroking account. This doesn't mean that you need to go through the traditional stockbroker model. There are nowadays many online platforms available so your same online broking platform where you can buy other shares also, you can certainly use that, but then there are also a number of dedicated ETF investment platforms that allow investors to do this very cost effectively, especially if you are looking to make investments on a regular basis. Some of the investment platforms are associated with specific ETF issuers, so in that case, you often will find that you can only buy the ETFs that are offered by that particular ETF issuer. But then there are a small number of platforms that will actually allow you to invest in most or all of the ETFs that are listed on the stock exchange. Those are the one that I would recommend if one wants to have as broad a range as possible and not be restricted to those that are offered by just a specific ETF issuer.

Stephen: Can you trade ETFs or should they be held for the long-term?

Nerina: So, one certainly can trade them but my view on ETFs is that they are better suited, especially for the retail investor they are better suited as long-term investment instruments. Because in most cases you are also buying a diversified portfolio of shares or investments you find that the variability in price from one day to the next or even intraday is not that significant. If you are investing in a single commodity ETF, for example, then you could find that they could actually be very good trading instruments. Here I am thinking specifically about precious metal ETFs such as gold or every palladium or rhodium or certainly some of your other commodity ETNs (exchange-traded notes), things like oil or wheat or corn, those sorts of things. For me, in large part, ETFs really are a great long-term investment vehicle, so the fact that one is able to trade them intraday on the stock exchange I don't think one should see them necessarily as trading instruments.

Stephen: How about if you want to invest in ETFs in other countries if you want offshore exposure?

Nerina: There are two ways that one can go about this: one certainly can go the traditional route, physically expatriating money, taking money offshore and then investing in ETFs in those global markets, maybe London or in New York or wherever the case might be. That's quite an expensive option, just like having money managed in any other way offshore can be quite expensive. A much more cost-effective way of doing it is to invest in a global ETF that is listed on the JSE, so on your local stock exchange, and we've got a nice big range of different global ETFs available nowadays. So this means that one can invest in something like a broad global or world index fund, or even an emerging market one, or there are also several that focus on specific countries, maybe the US, or the UK or Japan. Even in Africa, there are a number of Africa products available that gives one exposure to this particular investment market. But we now also have global ETFs available that cover the global property market, or the global bond market. So, as is the case with domestic ETFs, it means that one can construct a very nice, well-diversified balanced fund portfolio, a multi-asset portfolio, just making use of ETFs and this would include your global ETF exposure as well.

Stephen: ETFs are very popular in many developed markets. What sort of take-up has there been in developing markets like South Africa?

Nerina: South Africa was actually one of the first markets to get ETFs. The first one was listed in 2000, the now well-known Satrix 40 ETF. So they've been around for about 18 years in South Africa but the rate of growth has not been as quick in South Africa as it has been, certainly in a market such as the US and to a less extent also in Europe and in the UK. There are many reasons for that but I think one of the most important is that South Africa has got a well-established financial advise network that mostly makes use of unit trusts in the investments that they recommend for their clients. Where we see very good traction in terms of ETFs in South Africa is in the tax-free investment accounts but also your millennial investor as they come through they tend to want to engage more directly with their own investments, make their own investment decisions. I think the online nature, the nature of the ETF that you can get information about it online and also trade and invest in it online is something that is really attractive to younger investors. So it is certainly something which has grown very well. We are currently sitting at just under R85 billion of exchange-traded products listed on the JSE but there is scope for a lot more. Even though it has grown well it is still a relatively small part of the overall investment universe.

Stephen: Finally, you mentioned low costs. How do the costs of an ETF compare with other investments, such as a unit trust?

Nerina: Typically you find that investments that follow a rules-based strategy which is really what an index tracking strategy is all about - people might have heard of the term "passive investments". What this really means is that there is a ready-made recipe, there's an index that says how the underlying asset should be invested. These types of investments typically have lower costs for the underlying fund than a so-called "actively-managed" fund because there's no need to pay a portfolio manager or a group of managers to actually make decisions on what to include in the underlying investment. That's one reason why the costs associated with ETFs or index-tracking products are typically a lot lower than your actively-managed unit trusts. The other reasons why they are also very cost effective is because the underlying investments tend to stay a lot more static, don't change all that often. Indices typically are reconstituted or rebalanced once a quarter, so four times a year, and sometimes just twice a year, so the level of activity, the amount of activity inside an exchange-traded fund is a lot less than an actively-managed fund. Those frictional costs, the transaction costs of managing the underlying investment, is something which is often underestimated in the cost of investments. We tend to focus on the cost of the manager but actually, those underlying transaction costs can in some case really be very high. So those are just two of the reasons why ETFs typically are quite a bit more cost effective than more traditional actively-managed unit trusts.

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