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What are ETFs?


What are ETFs?

Published Date: 2018-05-02 | Source: Sponsored | Author: Stephen Gunnion

What are ETFs?

So, you've taken the first step and decided to invest in the stock market. With hundreds of shares to choose from in South Africa alone, it's difficult to know where to begin and how to select a portfolio of equities that are going to meet your investment goals.

Exchange-Traded Funds are a good start. They have been available on the Johannesburg Stock Exchange since 2000 when Satrix listed South Africa's first ETF, the Top 40, but their history dates back to the early 1990s when the Toronto Stock Exchange introduced Toronto 35 Index Participation Units, which tracked the exchange's top 35 shares. This was followed by the S&P 500 Trust ETF, which was launched by State Street Global Investors in 1993, tracking the 500 companies included in the index.

Since then, ETFs have become one of the most popular - and fastest-growing - ways for institutional and private investors to own a piece of the market.

Buying an ETF basically gives you a portfolio of shares that holds the underlying equity in the index it is tracking, in the same proportion as the index.

Using the Satrix 40 as an example, investors get exposure to the 40 biggest shares listed on the JSE, ranked by investable market capitalisation, through a single ETF. However, if you would like more specific sector exposure, you can buy a basket of shares invested in resource, industrial or financial shares. ETF issuers also offer specific offshore exposure to selected markets around the world. You can also buy a gold or platinum ETF if you want exposure to precious metals.

ETFs share many similarities with unit trusts as they are pooled investments. However, unlike unit trusts ETFs are listed on the JSE and have to comply with the exchange's own listing regulations. They are also regulated by the Financial Sector Conduct Authority, which has replaced the Financial Services Board as a dedicated market conduct regulator, which should provide additional comfort to investors.

ETFs are often described as "passive" or index investments as they track an existing or tailored index. That helps to keep the cost of investing in ETFs lower than many active funds, which employ fund managers to make decisions.

Since the early days, the market has developed to include more sophisticated ETFs that use a selection process to help deliver higher returns; removed some of the volatility; or select specific types of shares according to style, such as momentum or value. These are called "smart beta" ETFs and the cost of investing in these can be a little more expensive due to the additional expertise that is required to develop the indices they track.

Whichever you choose, it's best that you decide what kind of investor you are so you can make an informed decision.

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