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Exchange traded funds in South Africa

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Investec have launched 3 new Exchange Traded Notes - a Gold ETN, a SWXTRI ETN and a TOPTRI ETN.

What are ETFs?

Exchange traded funds (ETFs) are listed securities (e.g. on the Johannesburg Stock Exchange), whose returns depend mostly on the returns of the particular basket of underlying shares each of them tracks. Most ETFs try trade a market index, such as the Top 40 shares on the JSE.

ETFs v managed funds

Whilst ETFs may have lower costs than actively managed equity funds (as they don't have to conduct research), they do still have some costs and so are expected to underperform the index just like their actively managed brethren on average do. However, because they are not taking positions relative to the index, the underperformance relative to the index should be more stable than for actively managed funds.

Differences between ETFs and passive unit trusts

Unlike unit trusts, which can only be traded once a day at an unknown forward price, ETFs can be traded throughout the day whilst the JSE is open and you can trade at a known market value. This is particularly important if you're trying to time your market entry (e.g. wanting to take advantage of a price drop during an event, to increase investment). However, some of the ETFs are fairly illiquid, with only a handful of trades a day, meaning that you'll need to be a patient trader if you wish to avoid paying the full bid-offer spread. I generally avoid trading illiquid ETFs in the morning before 10am, as sometimes not enough participants have entered the market and the bid-offer spread is too high. As an example DBXJP, which tracks the MSCI Japan index, had a bid price of 427 and an offer price of 465 at 9am on the 10th August, but by 09h55 this had tightened to a bid of 446 and an offer of 450.

ETFs may pay out dividends quarterly or semi-annually, rather than as received from their underlying securities, which means there will probably be some cash drag in the ETF. This contrasts with unit trust trackers which can immediately reinvest dividends received.

ETFs are often set up so that if one of their investors so demands, they must deliver the exact basket of shares in the index they are tracking. Trackers in the unit trust market don't have this constraint, so have a marginally higher tolerance for deviations from the index than ETFs do.

Differences between ETFs and ETNs

Exchange-traded notes (ETNs) may sound like ETFs, but they are essentially unsecured debt securities issued by banks (e.g. Standard Bank), which usually provide returns equal to that of a market benchmark, less fees. The crucial difference between an ETN and an ETF is that an ETN carries the additional risk of the underwriting bank going bankrupt (yes, even banks sometimes go bankrupt), in which case the value of the ETN will be eroded. In fact if the credit risk of the bank deteriorates this will impact on the value before the bank goes bankrupt.

Platforms on which to trade ETFs

The easiest way to trade ETFs is via your stockbroking account. If you don't have a stock broking account, then you could use:

When do I consider Exchange Traded Products?

When I want exposure to a certain market, and don't have the knowledge to do the stock picking myself, and don't have the confidence that I can pick an active manager who'll outperform the extra fees I'll have to pay him, I consider investing in ETFs or passive unit trusts.

Sometimes ETFs are simply used because they're the most convenient method of gaining exposure. For example, when the tsunami hit Fukushima I wanted to take advantage of the panic and purchase Japanese stocks. I didn't have an account for trading individual stocks in Japan, so purchased some of the DBXJP exchange traded product, which tracks the MSCI Japan Index.

List of ETFs & ETN's in South Africa

Here's a list I compiled of ETFs & ETNs in South Africa. Please let me know if anything's changed from the below.

Asia
North America
Europe
Africa
Property

 

Gold

There are 2 gold exchange traded products:

Share name

Investec Gold ETN

SBAGAUG20

NEWGOLD Issuer Ltd

Share Code

 

SBAG1

GLD

Share type

Exchange Traded Note

Exchange Traded Note

Exchange Traded Fund

Tracking

Physical spot gold price in US Dollars (London). Ratio is 0.1 (1/10th of an ounce). No Exchange rate exposure.

Rand return of near dated futures contracts in Gold (created from the near dated USD gold future, USD interest rates and the USD/ZAR exchange rate)

Rand price of gold

Credit Risk

Investec Bank Limited

Standard Bank credit risk

Gold bullion debentures held in custoday by the NewGold Custodian, Brinks Limited. If anything were to happen to the Newgold manager, investors could claim their share of the bullion.

Return over year to 5 Sep 2012

-

3.6%

5.2%

Return

No exposure to the Dollar/Rand exchange rate.

Derived from:

(1) Change in value of near-dated futures contract price in US Dollars.

+ (2) USD deposit rate on collateral for the futures (overnight LIBOR - 0.125%)

+ (3) Changes in the Rand/US Dollar exchange rate

+ (4) Costs involved in rolling the futures as they approach maturity.

+(5) 0.5% annual management fee, paid daily

Purchases gold bullion debentures, with the fees that come with that (storage, insurance), and manager fees are subtracted.

Bid offer spread (measured at 09h45 on 6 Sep 2012)

?

0.12%

0.24%

TER

?

0.50% (30 June 2011)

0.40% (30 June 2012)

Emerging markets
World
Bonds & multi-asset class in South Africa

Buying ETFs

ETFs may be bought through a stockbroking account, on an investment plan offered by the ETF sponsors & on some linked-investment service provider platforms like Momentum Wealth.

Some ETFs can be purchased at ETFSA.

Investment platforms can be expensive as they generally charge fees based on assets under management, whereas online trading accounts usually charge for trades & a Rand amount each month.

These need to be weighed up against the fees on index unit trust funds (and also thought given to the underlying trading fees).

Updates

28 Mar 2012

Here's an interesting new instrument for investors fortunate enough to have a tax problem - Grindrod is introducing the first preference share ETF today - "PrefEx". PrefEx attempts to track the J251, an index that tracks the performance of preference shares of constituent companies on the JSE. PrefEx is expected to have a total expense ratio of 0.45% to 0.50% (the payment to Grindrod Asset Management), which you can save if you invest in the underlying securities yourself (of course that would carry its own risks, so is only for those who know what they're doing).

Underlying constituents today are (names & weights):

Standard Bank Group Ltd. Non-Redeem. Pfd. 18.56%
Absa Bank Ltd Pref 15.39%
Firstrand Ltd B Pref 14.87%
Nedbank Ltd Pfd 13.64%
Investec Bank Pref 8.84%
Investec Ltd Pfd 5.15%
Steinhoff Invest HldPrf 4.85%
PSG Financial Serv Pref 4.26%
Discovery Holdings ltd Pfd 3.04%
Grindrod Ltd Pfd 2.52%
African Bank Inv Pref 2.35%
Network Healthcare Cp 2.05%
Imperial Holdings Pref 1.55%
Capitec Bank Hldgs Pref 0.96%
Investec PLC Pref 0.88%
Sasfin Holdings Ltd Pref 0.60%
Astrapak Ltd Pref 0.48%

PrefEx is expected to have an initial return of 6% (obviously this will change).

21 Feb 2012

ABSA Capital are launching 5 new ETNs on the 12th March 2012, in addition to the 5 ETFs they launched in January:

  • NewWave Silver ETN, tracking the spot price of silver in Rands. This will compete against the existing Standard Bank ETN which tracks the Rand return of near dated futures contracts in Silver. A fee of 0.40% p.a. is charged

  • NewWave Platinum ETN, tracking the spot price of Platinum in Rands. This will compete against the Standard Bank ETN tracking the Rand return of near date futures contracts in Platinum. A fee of 0.40% p.a. is charged

  • NewWave US Dollar ETN, tracking USD Overnight LIBOR minus the interest rate spread (10bps at listing)

  • NewWave GBP ETN, tracking GBP Overnight LIBOR minus the interest rate spread (20bps at listing)

  • NewWave Euro ETN, tracking Euro Overnight LIBOR minus the interest rate spread (10bps at listing)

Jan 2012

Nedbank's BGreen ETF was launched as part of their commitment to accelerate SA's transition to a greener economy. This follows the launch of the Nedbank Green Index in July 2011.

The BGreen ETF invests in companies that have been rated by the CDP (Carbon Disclosure Project) as being one of the strongest performers in response to climate change & the best disclosers of their carbon footprint. It also looks at companies that have registered Clean Development Mechanism projects in SA with the UN.

The current top 10 shares are Nedbank, Barloworld, Gold Fields, Woolworths, Sasol, Mondi, Sanlam, Medi-Clinic, Pick 'n Pay and Impala Platinum.

26 Jan 2012

Newfunds lists a number of new ETFs on the JSE. There's one tracking money market rates, one tracking the SWIX40, one tracking inflation-linked bonds, one tracking government bonds and one tracking equity momentum (the momentum tracker I wont be investing in, as I just cant get my head around investing in something because its price went up recently).

  • NewFunds TRACI 3 month ETF (NFTRCI). References the total return version of the Barclays Capital/Absa Capital ZAR tradable cash index (3 month), which tracks the performance of 3-month SA money market deposit rates, sourced from various banks. Its closest competitor amongst ETFs is probably SBRJNOV13 (SBR003, Standard Bank Floating Rate Note maturing in November 2013, 3-month JIBAR + 0.3%). Also, this will compete with money market unit trusts.

  • Newfunds Equity Momentum ETF (NFEMOM), references the total return version of the Barclays Capital/ Absa Capital South Africa Equity Momentum Index,an index consisting of shares listed; the JSE, ranked by their relative price momentum over the assessment period, where shares with higher relative price momentum are given higher weightings. Universe is all shares, selected by liquidity.

  • Newfunds SWIX 40 ETF (NFSWIX), referencing the FTSE/JSE Africa Shareholder Weighted Top 40 Index Total Return. This will compete with the SATRIX 40 & STANLIB40.

  • Newfunds ILBI ETF (NFILBI), references the total return version of the Barclays Capital/Absa Capital South African Government inflation-linked bond index. This will compete with INFLATION-X.

  • Newfund GOVI ETF (NFGOVI), which references the total return verson of the South African Bond Total Return Index (GOVI Index). This will compete with the ZGOVI (Investec ETF, portfolio of government bonds).

 

 

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