Top40 ETFs: All things aren’t equal
Far f rom being a high-brow investor, my investment decisions are based on a single concern: how much money can I make from as small an investment as possible? In Finweek terms, I’m the Little Leagues. In the 16 January edition, I mentioned that fees are one of the major concerns when investing. I’m not alone in my dread of fees. Financial advisers constantly remind our readers to keep a close eye on the costing structure of products before investing.
As an investor of my own money (thankfully only my own) I have to admit to a degree of reluctance when investigating fees. It’s just such a drag. If you can actually get to the literature on product fees, it’s so full of jargon that a layperson can only understand it with much effort.
Finweek reader Irene Botha can relate to my frustration and asked me to do some digging into the fees of various products. I’m going to do just that, working on the assumption that you invest directly and not through a broker. First, I need to explain three concepts that will help us understand what I’m on about, namely indices, ETFs and the total expense ratio (TER).
For the sake of comparing apples with apples, we have to make sure that we’re comparing the fees of like products. For that reason, I’m going to look at the fees involved in Top40 exchange-traded funds (ETFs). However, to understand what an ETF is, we have to understand what an index is. See how this is already getting out of hand?
An index is a way for us to see what the market is up to. It tracks the performance of certain sectors of the market (or the market as a whole) to see if the sector is making or losing money. Think of it as a report card, only instead of subjects, you have a group of very big companies. An index is not a product, just a report, so you can’t buy it. That’s where ETFs come in.
An ETF is in its essence a collection of shares that track a specific index. If, for example, you wanted to invest in the sweet chilli sauce sector, you would buy an ETF that consists of all the sweet chilli sauce companies – one for each company. The ETF is therefore the product that tracks the index. (To save you some time, I should tell you that there’s no ETF in South Africa that tracks sweet chilli sauce.) You can buy ETF products from various financial service providers and online platforms. Many people (myself included) start their investment portfolio by investing in a Top40 ETF, but sadly it’s not free. Before I choose an ETF product, I have to compare the costs. It’s a lot like buying eggs, actually.