Financial Mail - Investors Monthly
Easy as ETF
Exchange traded funds are efficient and cost-effective, and offer a great deal of diversification, writes Pedro van Gaalen
Navigating the SA investment landscape is fraught with potential dangers due to weak economic fundamentals, systemic sociopolitical risks, concentration risk in the local market and rand volatility.
In this context, prudent riskmitigation strategies require diversification across asset classes and geographies.
“Not keeping all your eggs in one basket is a truism that still applies to SA investors,” says Yusuf Wadee, head of exchange traded products (ETPs) at Satrix.
“Over the past few years, the SA equity market has not managed to break out of its sideways trend. Offshore markets, on the other hand, have offered very healthy returns, coupled with exposure to nonrand assets, which have been attractive due to the depreciating local currency.”
Faced with these challenges, Wadee suggests that meaningful allocations to both local and offshore markets remain a prudent approach to long-term portfolio construction. In this regard, exchange traded funds (ETFs) offer investors an efficient and cost-effective means to achieve investment objectives.
“The 78 ETFs listed on the JSE cover a spectrum of asset and geographic exposures and create diversity in the options available to local investors,” says Adèle Hattingh, business development and ETP manager at the JSE.
These passive investments include equity-based ETFs, in addition to access to government debt, commodities and property, among other asset classes.
“ETFs now represent multiple asset classes and offer a practical means to construct portfolios for both passive and active investors, where just a small number of ETFs can give you a well-balanced, diversified fund,” says Hattingh.
Wadee adds: “ETFs listed on the JSE also provide local investors with a simple and easy way to gain exposure to offshore markets and trending themes like the exciting and fast-growing tech space.”
For instance, the Satrix Nasdaq 100 ETF offers local investors direct exposure to global big tech stocks like Google, Amazon and Tesla, which have emerged as outliers amid the market carnage wrought by Covid-19.
As of mid-October, the Nasdaq 100 was again trading above 12,000 — just below its September record high of 12,420 — following the March sell-off, which represents a 29% year-to-date return and a 43.72% annualised return.
Moreover, ETFs are adept at implementing factor or smartbeta investment strategies, says Wehmeyer Ferreira, executive director at 1nvest.
“Smart-beta ETFs apply an active manager bias or style to select investments and wrap it in an index. This approach creates opportunities for investors to achieve alpha, but at lower fees and without any subjective decision-making or emotion.”
Common smart-beta factors or themes include growth, quality, momentum, volatility, sector-specific and value, with ETFs an easy and accessible way to tap into these strategies.
“For example, globally, the growth investment style has outperformed the value investment style, with growth in recent years predominantly focused on technology stocks, whereas value investors remain focused on financial stocks in the US. As such, local investors who would like to emulate this investment style can gain exposure to growth factors via big tech ETFs like the 1nvest S&P 500 Info Tech ETF.”
Beyond thematic options, ETFs also offer investors opportunities to gain exposure to various markets, adds Ferreira.
“In SA, there is a long list of ETFs that track global benchmarks and, depending on preferences, offer exposure at differing levels of granularity.”
For example, local investors looking for exposure to developed-market equities can choose the Satrix MSCI World or the S&P 500 Feeder ETFs, while ETFs like the Satrix MSCI Emerging Markets and China feeder portfolios offer diversification into key potential growth markets.
ETFs have also emerged as a popular channel to satisfy the growing demand for environmental, social and governance (ESG) investments.
“Globally, ESG-focused investing has experienced phenomenal growth, especially in the US and Europe. Assets held in 400 global ESG ETFs and ETPs surpassed $100bn in July this year, which is five times what it was two years ago,” says Hattingh.
While uptake lags in SA, Satrix recently launched two ESG-focused ETFs on the JSE, a first for the local market.
“These new listings will enable investors to pursue their ESG objectives in both developed and emerging markets, and further take control of their investment outcomes,” says Wadee.
“We based these ETFs on investment strategies designed to maximise exposure to positive ESG metrics while reducing exposure to carbon dioxide and other greenhouse gases.” ●