One of the greatest frustrations I have as a personal finance educator is how many unnecessary investment options there are for individuals. Did you know that there are over 1 200 unit trusts available in South Africa? That’s three times the number of companies listed on the Johannesburg Stock Exchange (JSE)! Many are “me-too” funds which mostly duplicate each other, and others are so specialised they are only for sophisticated investors who want to build up a very specific portfolio. Yet all that choice just makes it more confusing for the ordinary investor with R500 to R2 000 a month to invest.
Then we come to exchange-traded funds (ETFs) which in theory should simplify the selection process because these funds simply track an index. They give you diversified exposure to the market without worrying about the relative performance – and costs – of an active asset manager.
Yet we now have around 76 ETFs, many of which track the same index, and investors are spending way too much time deliberating over which fund to invest in rather than just starting to invest.
Listen to Maya and Mapalo Makhu discussing this and other topics in the My Money, My Lifestyle podcast.
I will share a case in point about my personal investments. When my son was about two years old, I opened a Satrix Top 40 investment for him. At that time, Satrix was the only player in the market offering ETFs. The investment meant that he got the average return of the 40 largest shares in South Africa. I started the investment with R200 per month and at some point increased it to R300. After ten years, by the time he was 12 years, old it was worth nearly R100 000.
It is possible that in hindsight, some other investment may have outperformed in that time period, but if I had spent time deliberating what to be invested in, worrying that I may be missing the “next big thing” I would have missed the incredible power of compounding. Returns are easy to see in hindsight but impossible to predict. There are only two things you can predict: how much you are going to contribute and how much you are going to pay for the investment.
That is why costs are a big part of the investment decision and why many people are starting to opt for ETFs which provide cost-effective investment options.
I spoke to Mike Brown who heads up ETFSA, the widest ETF investment platform, to give his views on what one should consider when selecting an ETF.
Choose an ETF manager
Brown says that the competition in the ETF space has driven prices down and for most vanilla ETFs that track common indices, the costs are competitive and not a major factor.
There are other considerations such as liquidity which may drive up trading costs, but Brown says those are more a concern for larger institutional investors.
His opinion is to stick with the major retail-focused ETF houses like Satrix, CoreShares and Absa. As they have good liquidity, they do not have a wide bid and spread offer (in other words there are enough buyers and sellers not to create a spread in price). They have reasonable costs and are more retail focused so tend to have lower minimums.
They have a wide range of options including offshore which they invest in via feeder funds into large global ETF players like Vanguard and iShares.
Choose your exposure
The next thing you need to decide is what you want to invest in. For the sake of this article we are assuming a longer-term investment of five years or more. Typically, people invest in ETFs for their longer-term investments or as part of their tax-free savings allocation.
You need to decide if you want to only have exposure to the South African market or if you want to include global exposure. The majority of ETFs track equity indices so you can have local exposure to shares listed on the JSE, or global exposure to indices like the S&P 500 or the MSCI World Index.
Brown recommends that if you have R500 per month to invest, you split it between South African exposure through a Top 40 ETF or CoreShares’ Top 50 ETF, and then select an EFT that tracks an offshore index like the S&P 500 or Satrix MSCI World.
If you have R1 000 or more to invest you could select a portfolio of ETFs which is managed on your behalf or split across four different ETFs to give asset diversification. This could include a South African index, an offshore index, listed property and a bond index. ETFSA offers managed portfolios for contributions starting at R1 000 per month.
Their balanced fund holds 25% each of the following:
- Satrix MSCI World (tracks the MSCI World index, comprising over 1 600 shares across the developed markets)
- New Funds GOVI ETF (tracks the Government Bond index)
- Coreshares SA Top50 (Top 50 largest SA companies but capped at 10% weighting providing better diversification)
- Coreshares PropTrax Ten (10 largest listed property companies on the JSE)
Their equity fund holds:
- 35% Satrix MSCI World
- 25% CoreShares SA Top 50
- 20% Ashburton MidCap (tracks the Mid-Cap index containing the 60 largest companies listed on the JSE that are not included in the FTSE/JSE Top40 Index)
- 20% Coreshares Dividend Aristocrats (30 companies that have increased or maintained stable dividends for seven consecutive years)
Their international portfolio holds:
- 20% CoreShares Global Property (tracks The S&P Global Property 40 index providing exposure to the 40 largest global property companies in developed markets that have earnings and dividend stability)
- 30% Satrix MSCI World
- 30% Satrix MSCI Emerging Markets (tracks the MSCI Emerging Market index containing 1 200 shares in emerging markets)
- 20% CoreShares Global Div Aristocrats (tracks the S&P global dividend aristocrats blend index comprising international, dividend-paying companies)
How to invest
ETFs can be bought through any stockbroker or through the provider’s own platform. For example, SatrixNow and Coreshares offer very easy-to-use, low-cost platforms for their range of ETFs, for contributions starting from R250 per month.
You can also select to purchase them as part of your tax-free savings account. They have a wide range of funds so if you wanted to purchase more than one ETF, you could have a well diversified ETF portfolio on their platforms.
Both offer good value. Coreshares charges only 0.1% for brokerage (when you buy and sell your ETF) and 0.3% annual platform fee. SatrixNow charges brokerage of 0.25% and 0.1% for recurring investments (0.35% in total for each deposit) but no platform fee.
Stockbroker EasyEquities offers a cost-effective platform (this is the same one used by SatrixNow) but allows you to purchase across a range of ETFs. They also offer bundled options where you purchase a managed portfolio of ETFs, however, you pay an additional 1% per annum management fee.
ETFSA offers access to the full range of ETFs with a platform fee of 0.5%. You can purchase their managed portfolios for an additional 0.5% per annum.
Depending on how much you are investing each month, stick to two to four ETFs. To keep costs low you can create your own portfolio of ETFs rather than paying an additional management fee. Just focus on asset diversification rather than buying the same type of fund. There is no point in buying two or three ETFs that all track SA equities. Have exposure to South African equities, offshore equities, some property and some bonds.
Alternatively, you can opt for a tracker balanced unit trust fund. Not to add to the confusion, but some unit trusts are not actively managed and also track an index. The fact that they are unit trusts and not ETFs allows the manager to blend various indexes together to create a single fund. For example, Satrix has the Balanced Unit Trust fund for less than 1% per annum and which can also be purchased on their SatrixNow platform. It invests in local and offshore equities, bonds and property.
What is the difference between an ETF and a unit trust?
Both of these investments make it far easier to invest on the JSE because they give an investor exposure to a wide range of shares for as little as R300 a month or even less.
A unit trust is an investment product offered by a fund manager. They pool the money of many investors into an investment portfolio. In most cases this portfolio is actively managed by a fund manager who selects the underlying investments based on their research.
Depending on the mandate or the aim of the fund, the fund manager can invest in a wide range of asset classes – meaning they can buy shares both locally and internationally, invest in bonds, cash and listed property.
An exchange-traded fund (ETF) also gives the investor exposure to a basket of shares except that an ETF is itself a listed security. What that means is that you can buy an ETF through a stockbroker and by buying just one ETF you have exposure to many underlying shares. This is because an ETF tracks an index made up of a basket of shares. For example, if you bought an ETF that tracks the JSE Top 40 index, you would own a small part of every company on the list of the 40 largest companies on the JSE.
Because an ETF only tracks an index there is no active manager selecting which share to invest in and you get the average return of the market less costs. Therefore, the fees of an ETF are generally lower but it can only track a single index. So, unlike a unit trust that could have a mandate to invest across multiple asset classes, a single ETF would only invest in a single asset class, whether that is local or international shares, or listed property.
This article first appeared in City Press.