Finweek English Edition

To buy or not to buy

With so many exchange-traded products listed this year, how do you decide which are worth your time and money?

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we’ve seen a bunch of new exchangetr­aded products (ETPs) listed over the past year and we now have 85 exchange-traded funds (ETFs) and about as many exchange-traded notes (ETNs) on the JSE.

In this issue, what I want to touch on is the process of how to decide whether that new shiny ETP is worth adding to a portfolio.

The first question is whether it is a carbon copy of an existing ETP which you own? If it is, then it’s worth checking some details such as the total expense ratio (TER) and whether the ETP is maybe a total return product. A cheaper TER is always attractive and buying the newer and cheaper one is a simple decision – do it.

Total return means that the ETP will reinvest the dividends or interest income rather than pay it out to the holders of the product. If you prefer a total return asset, then go for that one. I usually prefer dividends being paid out as I can then invest that income as I see fit.

The big issue is when the new ETP is completely new, such as the recent global healthcare ETF from Sygnia or the global infrastruc­ture fund from Satrix. The first thing to do here is to check how much healthcare you already have through your existing ETPs. An S&P 500 ETF has around 13% invested in healthcare stocks and it’s the second-largest sector in the index. Now, that’s a chunky percentage already, so if you have an S&P 500 ETF, then buying the healthcare ETF will upweight a sector you already have a fair weighting in. Now sure, maybe you want a lot more healthcare, in which case the new ETF is a perfect way to add weight to that sector.

Staying with the above example, the sector breakdown does not directly mention infrastruc­ture so it’s harder to determine the exact weighting in this example.

Industrial­s and real estate investment trusts (Reits) will both include some infrastruc­ture while utilities and energy will largely be exclusivel­y infrastruc­ture. By my estimate we end up with around 10% to 11% of the S&P 500 invested into infrastruc­ture. Further, infrastruc­ture generally has a lower volatility and a higher dividend payout. So, if you like the idea of a smoother investment with higher income, this new ETF would certainly do the trick.

Also consider if it can be invested into a tax-free account. ETNs are not eligible for tax-free investment­s, and neither are commodity ETFs. If you focus on investing through your taxfree investment and an ETP is not eligible, then it’s not worth worrying about it as you can’t buy it as you want to.

The key is that just because it’s new does not mean you need to own it. Way back when we had far fewer ETFs on our market, I pretty much bought every new one that listed and in no time I had close to 20 ETFs in my portfolio and a lot of duplicatio­n and overlap. For example, I had a Japan-focused ETF, and I also had exposure to Japan in my world ETF. It wasn’t that I was extra bullish on the Japanese economy. It was rather that I liked new ETPs.

The last point is that if you decide to switch into a new ETP, do you sell the existing one you hold? That raises a cost issue. Firstly, will it incur tax? Secondly, how much will the buying and selling cost as well as the spread (difference between buy and sell) be? Often this can be as much as 2% and then you’ll need to consider how much you’ll save every year. If it is a full percentage point, then great. If it is only 0.1%, it’ll take two decades to recover the costs and thus not worth the switch. ■ editorial@finweek.co.za

The key is that just because it’s new does not mean you need to own it. Way back when we had far fewer ETFs on our market, I pretty much bought every new one that listed and in no time I had close to 20 ETFs in my portfolio.

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