Top40 ETFs: All things aren’t equal

Finweek English Edition - - INSIDE -

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.

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