Exchange traded funds (ETFs) are index funds listed and traded like ordinary shares on stock exchanges. You can buy an ETF that tracks an index (like the JSE All Share), sector (like industrial shares) or commodity (like gold), to name a few.
Profits (or losses) are made from the difference between buying and selling prices. Like any other security, ETFs carry the risk of losing rather than gaining money.
Individual investors should view ETFs as core, long-term investments. Held for the long term, ETFs are a proven way to smooth the price fluctuations of buying and selling securities.
Trusted investment vehicle
Introduced in the United States in 1993, ETFs have been a trusted feature of the South African investment landscape since 2000. Given their growing popularity, ETFs now have a dedicated trading platform, etfSA.
By 2009 there were over 2 000 ETFs listed on stock exchanges in 42 countries worldwide, managing more than US$862 billion on behalf of investors. In South Africa, there are now 25 ETFs listed on the JSE with R27 billion in assets under management.
Spreading the risk
With an ETF, you get exposure to a broad range of assets across developed and emerging markets. ETFs are an effective and secure means of trading a basket of shares – index, sector or commodity – through a single transaction.
ETFs were designed for investors in a changing world. In today’s market, the traditional approach of an investment portfolio based mainly on blue-chip domestic stocks and bonds may not be the most appropriate approach. Companies and commodities trade around the globe and are subject to different risks in each geography.
With an ETF, you get instant exposure to a basket of securities, helping you spread your risk more widely.
We believe that diversification, or spreading the risk, is the safest approach to ensure your investment portfolio performs as expected across a range of market conditions.
Lower Costs
ETFs have a low fee structure because they aim to match the performance of an index (a passive fund). Actively-managed funds, such as some unit trusts, aim to outperform the market so they buy and sell more often than index-tracking funds , and therefore tend to have higher transaction costs.
Liquidity
ETFs are easy to buy and sell. This is referred to as being liquid. All ETFs have a Market Maker to ensure that liquidity is always maintained. If there is no willing buyer or seller at the other end of your trade, the Market Maker will always step in to be the missing counter-party.
Convenience and Flexibility
ETFs offer exposure to broad markets through a single investment transaction and respond to market movements on securities exchanges throughout the trading day.
Unit trusts, on the other hand, require the active attention of fund managers, therefore investors will not know when and at what prices the shares in their unit trust portfolios are being traded.
ETFs are also easily traded, with investors buying and sell ETFs like shares, typically through a stockbroker account. Investors can also invest in ETFs through investment plans with accredited financial services providers.
Please click on the "How to invest" tab on the top of the page to find out more details on the different ways to invest in our ETFs.
Transparency
The holdings of an ETF closely mirror the underlying index it tracks as a benchmark. These components are fully disclosed. In contrast, unit trusts tend to only disclose their top 5-10 holdings.