Finweek English Edition - - COMPANIES & INVESTMENTS -

Q: Have you seen any in­ter­est in a par­tic­u­lar ETF or ETN re­cently?

There has been a lot of in­ter­est in NewGold Plat­inum (NGPLT)*, a re­cent- What are ETFs and ETNs? An ex­change-traded fund (ETF) is a se­cu­rity that usu­ally tracks an in­dex. The ETF can achieve this by pur­chas­ing a bas­ket of as­sets. The ETF trades like a stock and can be bought and sold any­time while the mar­ket is open. ETFs are struc­tured so that the price stays very close to its net as­set value ( NAV) – in other words, the value of the en­ti­ties mak­ing up the bas­ket or in­dex. You can trade just about any type of as­set us­ing ETFs. Want to get ex­po­sure to the Ja­panese stock mar­ket? No prob­lem, buy the ETF that tracks the Nikkei. How about trad­ing gold? No prob­lem, you need not pur­chase Kruger Rands, just buy NewGold, which is the ETF that tracks the gold price in rand.

ETNs (ex­change-traded notes) are a cousin to ETFs and serve ba­si­cally the same pur­pose for traders. ETNs also track in­dexes but there are some in­dexes where it is dif­fi­cult to ac­tu­ally buy the bas­ket of as­sets – it is for this rea­son ETNs were in­vented. ETNs are struc­tured prod­ucts that are is­sued by ma­jor banks as se­nior debt notes. The re­turn you re­ceive from the note is struc­tured to give you the same re­turn that you would re­ceive if you could pur­chase a par­tic­u­lar in­dex. The main dif­fer­ence be­tween an ETF and an ETN is that the ETN is a debt prod­uct whereas the ETF ac­tu­ally owns the un­der­ly­ing as­sets. There are a num­ber of com­mod­ity ETNs listed on the JSE that would give an in­vestor ex­po­sure to, in­clud­ing wheat, cop­per, oil, etc.

JSE listed ETFs and ETNs track eq­uity in­dices (lo­cal and off­shore), phys­i­cal com­modi­ties and other as­set classes (bonds, prop­erty, etc). There is also a shariah-com­pli­ant ETF listed that tracks a lo­cal shariah-com­pli­ant JSE in­dex. ly listed ETF that pro­vides in­vestors with the op­por­tu­nity to ob­tain ex­po­sure to the rand per­for­mance of plat­inum. What is unique about the me­tal is that ap­prox­i­mately 70% of all plat­inum is sourced from South Africa and as such any in­ter­rup­tion to sup­ply due to in­dus­trial ac­tion or elec­tric­ity short­ages will pos­i­tively im­pact the price. If SA min­ing pro­duc­tion dropped, this would weaken the rand and help this ETF to move higher.

*For more on this ETF, please see Si­mon Brown’s com­ments on page 36. Q: What are CFDs? A: The CFD, or con­tract for dif­fer­ence, is an in­vest­ment in­stru­ment that al­lows traders to par­tic­i­pate in the price move­ment of se­cu­ri­ties or in­dices with­out full own­er­ship of the un­der­ly­ing stock. CFDs en­able in­vestors to lever­age an in­vest­ment through the use of gear­ing. For ag­gres­sive, risk-tak­ing in­vestors, the abil­ity to lever­age the in­vest­ment is a prin­ci­pal ben­e­fit of the prod­uct.

CFDs can also be used to hedge an ex­ist­ing stock port­fo­lio. Rather than liq­ui­date or sell one’s phys­i­cal stock port­fo­lio dur­ing a pe­riod of fall­ing prices or volatile mar­kets. In­vestors can quickly hedge po­ten­tial risk by sell­ing the equiv­a­lent po­si­tion us­ing CFDs for a short or long pe­riod, thus se­cur­ing ef­fec­tive pro­tec­tion for their stock in­vest­ments at lit­tle or no cost.

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