ETFs pin down costs, open doors to markets

PASSIVE funds, especially exchange traded funds, are becoming increasingly popular in South Africa as investors seek cheaper ways to access markets and financial services providers expand their range of products.

The success of Satrix illustrates the trend.

“We started at R800-million in assets under management back in 2000. We’re now at R60-billion,” said Satrix CEO Helena Conradie.

But Satrix has been slow to introduce a wider range of ETFs, focusing instead on meeting the demand for more unit trust products.

Absa has introduced 16 ETF products, while Grindrod Bank’s CoreShares range offers eight ETFs, including a property index tracker and a composite green index tracker for the environmentally aware investor.

Deutsche Bank’s DBX ETFs offer investors a chance to invest in top companies in the UK, US, eurozone and Japan, as well as its DBX world fund, which mimics the MSCI world index.

Through its SatrixNOW platform, launched in partnership with EasyEquities, Satrix has managed to lower the minimum investment amount, allowing investors to invest as little as R5.

The trading platform was intended to “democratise the stock market — making it easy and cheap for all South Africans to invest and save”, said EasyEquities brand manager Carly Barnes.

SatrixNOW has about 4 500 registered users, with assets of about R150-million.

Three years ago, Satrix founding director Mike Brown launched etfSA, a platform that exposed consumers to a wider range of ETFs, including investor clubs and stokvels.

“It’s there where we need to develop ease of access so that you can eliminate the layers and obstacles to accessing cheap investments.”

Brown said simple investing platforms that provided customers real-time access to their investments, instead of monthly or quarterly statements, were crucial to the democratisation of the financial sector.

Platforms such as etfSA, EasyEquities and SatrixNOW allow investors to invest as and when they have income, which means people in the informal sector — spaza shop owners, taxi drivers and freelancers — can invest.

Nerina Visser, a director at etfSA, said: “We attract the people outside the formal sector because of the flexibility we offer.”

Investors could arrange for a debit order but were not penalised if payments are missed.

Stokvels, which account for a large number of retail investors on etfSA, are allowed to invest variable amounts depending on member contributions.

In South Africa, a 16-year presence — with most of the products only being developed in the past four years — means investors don’t have much to look to when it comes to measuring past performance. The Satrix Top 40 ETF has delivered a 15.33% return since its inception in November 2000

In 1975, US financial services company Vanguard became the first to introduce index-tracking funds. It manages $3.5-trillion (about R50-trillion) in assets.

Passive funds have a considerable role to play in reducing the cost of investing.

“To generate considerable revenue growth you need very high volume asset growth,” said Nersan Naidoo, CEO of Sanlam Investment Core.

Although Naidoo believes Satrix is in a position to become South Africa’s Vanguard, Conradie believes this will be difficult because the market is so much smaller.

To attract high volume asset growth, costs will have to be cut even further — and issuers of ETFs and other passively traded index funds will need to achieve economies of scale.

For platforms such as etfSA, achieving a R1-million investment means 3 332 people investing R300 every month, and Brown said reaching those kinds of volumes was a challenge.

“It costs you a lot more to process that million rand at R300 a month than a once-off investment.

“There are a lot of stockbrokers or fund managers who won’t even look at anyone who wouldn’t give them a million rand upfront, let alone take on someone who is prepared to give them a R1 000 lump sum investment,” said Brown.

Conradie said: “There are so many developments in the industry that you can’t afford to be irresponsible with the price point. Your ticket to the game is pinning down the cost as soon as possible.”

We attract the people outside the formal sector as we offer flexibility