The shape of SA’s ETF market

DIFFERENT: OTHERS ARE EQUITY FUNDS Commodity funds continue to dominate locally.

The total amount of money invested in SA collective investment schemes is about R2 trillion. The overall market capitalisation of all the JSE-listed exchange-traded products at end December was just R85 billion.

In other words, exchange-traded funds (ETFs) and exchange-traded notes (ETNs) make up a fraction of all the assets in local investment products. Unit trusts remain, by far, the most popular vehicle.

This is quite different to the US, where ETFs command a much larger market share.

Some argue we won’t see this trend to the same extent here, as index funds are naturally limited by the JSE’s nature. Since it’s a small, concentrated market, the JSE doesn’t lend itself to index-tracking quite as well as others that are far broader and more diverse. Unlike almost all other markets, the largest SA ETFs aren’t equity funds. They are Absa’s NewGold and NewGold Platinum funds.

Four of the 10 largest ETFs in SA are precious metal funds. Three more track international indices. Only three reference the local equity market.

In the US however, the five largest ETFs all track a Wall Street Index. Three reference the S&P 500. Number nine is a bond fund and number 21 the largest commodity fund.

In SA, however, the largest local ETF issuer is Absa Capital.

The bulk of its assets are held in its three commodity products. The value of Absa’s assets under management is almost double that of Satrix – by far the largest issuer of equity funds.

Are local equity ETFs just not compelling enough because they aren’t broadly diversified, and they expose investors to high levels of single stock risk due to how Naspers dominates the local market?

This must be part of it, but since it’s quite a sophisticated argument it’s unlikely that it’s a primary consideration for retail investors. It’s more likely appetite and access.

In general, pure equity funds are becoming less popular in SA. Over the last decade unit trust investors have shown a very clear preference for multi-asset, or balanced offerings.

There are no fully-diversified, multi-asset ETFs. Absa has listed two products that give both equity and bond exposure, but they’re very simple and have never attracted much interest.

Passive managers have realised in the past few years that if they want to compete in the SA market, they must have a balanced unit trust offering. That is what investors are interested in, and they’re seeing some success here.

The second issue is how investors access the funds. The bulk of money going into the SA industry comes through linked investment service providers (Lisps), which don’t support ETFs.

Passive providers have therefore increasingly begun replicating whatever they offer as an ETF in unit trust form so they can get these products onto the country’s big Lisps.

This suggests that it’s possible the local ETF industry won’t show the growth seen in the US. It may well be that commodity funds continue to dominate here.