In newsprint lexicon, both in South Africa and globally, the terms “ETF” and “index-tracking” have become almost synonymous. It may thus be useful to explain ETFs in the context of index-tracking.
In newsprint lexicon, both in South Africa and globally, the terms “ETF” and “index-tracking” have become almost synonymous. It may thus be useful to explain ETFs in the context of index-tracking.
ETFs themselves are just a special version of unit trusts – they are unit trusts listed on the JSE and bought and sold through a stockbroker like any other share, whereas index-tracking is a method of managing assets by investing in shares that make up a well-known market index, such as the FTSE/JSE Top 40 Index. Since this does not require the input of highly paid investment professionals, funds which are managed on an index-tracked basis are much cheaper than funds managed “actively”. Apart from the cost, another consistent statistic across countries is that over five-year periods only 15% of active equity managers or their funds outperform market indices. Hence, as an investor, investing in an index-tracking fund is a win-win investment.
Index-tracking can also be accessed via standard unit trusts, but as mentioned many investors equate index-tracking with ETFs.
In South Africa, ETFs have a reputation for being expensive. That reputation is well-deserved, but not for the reasons that one might think. The ETF, just like a unit trust, has a management fee embedded in the product itself. In most cases that fee is modest and lives up to the reputation of being low cost. The problem, however, starts when you want to purchase an ETF, at which point you may quickly find that the cost of accessing ETFs becomes quite high.
Firstly, the price of ETFs is driven by forces of supply and demand, just as for any share. Hence you must ensure that you do not overpay for an ETF relative to the value of the assets that actually make up that ETF.
Secondly, an ETF has a bid and an offer price. This means that if you were to buy and then instantly sell an ETF, you would pay a higher price for it relative to what you could sell it for. That bid/offer spread is meant to represent the trading costs associated with purchasing the shares that make up the ETF’s investment portfolio. However, when there is no demand for a particular ETF you might find that the spread of prices widens considerably. In addition, as with any JSE-traded shares, you have to pay JSE trading costs.
However, the most expensive parts of “accessing” an ETF comes next: to buy an ETF you have to open a stockbroking account. Hence you will pay brokerage when you buy or sell an ETF, and this brokerage may range from 0.35% to 1% of the value of your transaction, equivalent to paying an initial fee and an exit fee. In addition, you may have to pay monthly stockbroking administration fees. If you want to invest in an ETF on a monthly basis via a debit order, or for that matter via a retirement annuity or a preservation fund, you will have to open an account with a LISP platform. The LISP platform normally charges an administration fee too, and that fee can range from 0.40% to 0.80% per annum.
Once you add up all the fees associated with accessing a standard ETF the cost is not dissimilar to investing in an actively managed unit trust.
Sygnia is in the process of purchasing db X-Trackers, a suite of ETFs that track international market indices and hence offer great protection against the depreciation of the rand. In order to lower the cost of access for retail investors we will not charge any LISP-platform fees for investors who wish to access our ETFs via debit orders or savings products, and we will charge only 0.10% stockbroking commission to cover our expenses. In a single stroke we have significantly lowered the cost of access to our ETFs, living up to our promise of always being a market disruptor.