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Accessing offshore shares via an ETN

Nov 9, 2020

Ordinary South African investors now have more options to access to global companies.

Accessing offshore shares via an ETNTechnology is making it easier and cheaper for South Africans to get exposure to shares in large global US-listed companies like Apple, Facebook and Netflix.

This month FNB announced a new investment product that allows South Africans exposure to these global giants for as little as R10 a share.

This has been made possible by the creation of an Exchange Traded Note (ETN) which is a JSE-listed instrument which tracks the returns, including dividends, of a specific share.

You invest with Rands and receive your money back in Rands, but the FNB ETN tracks the performance of the actual share with or without a currency conversion. The ETN is in effect a promise to pay the return profile, so the risk sits with FirstRand’s balance sheet.

As this is a JSE-listed instrument you can purchase it through any stockbroker, including FNB’s Share Builder platform.

Listen to Maya and Mapalo Makhu discussing this in the My Money, My Lifestyle podcast.

FNB is listing 20 ETNs this year, with the first ten listed on 1 October 2020 which included Alphabet (Google), Apple, Amazon, Facebook, Microsoft, Netflix, Tesla, Coca-Cola and MacDonalds.

According to Bheki Mkhize, CEO of Wealth and Investment Solutions at FNB, the most popular ETNs at the moment are Tesla and Apple.

How the ETN works

If an investor buys an Apple ETN for R10, the investor is effectively lending the bank R10, while the bank promises to repay the investor an amount linked to the growth (or decline, as the case may be) in the Apple share price, or the combination of the Apple share price and $/R exchange rate.

The investor therefore gets a return similar to investing directly in an Apple share, except that the return is paid to the investor by the bank, and not by the Apple share directly. This includes dividends which are reinvested.

Investors can purchase an FNB ETN with currency exposure or without. If you believe the Rand will weaken, you would want to purchase the ETN with a C in the share name. For example, if you wanted to buy Netflix with currency exposure you would invest in FNBETNFLC – the “C” stands for Composite. If you just want the share price change in dollars, you would purchase the share code with a Q – FNBETNFLQ – which stands for Quant.

What it costs

Platform fees

There will be costs charged by whichever stockbroking platform you use to purchase these ETNs. These costs would include a brokerage fee and possibly a monthly management fee, depending on your platform.

For example, FNB Share Builder charges a brokerage fee of 0.7% for the trade and a monthly management fee of R45. (Note that FNB Share Builder has removed the minimum brokerage fee of R100). An investment of R1 000 in the ETN would cost R7 in brokerage, plus the R45 monthly fee, which  would eat into your returns. Over a year you would need to have a return of 54% on the R1 000 just to cover the monthly fee. So, although you can purchase small amounts, it may not be worth it unless you have at least R20 000 in your Share Builder account – and even then, the annual cost of R540 would be equivalent to 2.7% of the portfolio.

There are more cost-effective platforms like EasyEquities which charges a brokerage fee of 0.25% and has no monthly admin fee. This makes it more cost effective for those who want to invest lower amounts.

Product fee

While the FNB Quanto ETNs have no margin, the FNB Compo ETNs have a tracking margin of 100bps per annum which reduces the net asset value.

When purchasing any ETN there is a bid-offer spread of around 100bps. This is the difference between the buy and sell price, and allows the market maker (FNB) to earn an income to cover its costs. This means there is an intrinsic cost of one percentage point to buy the ETN because if you had to sell it immediately you would get one percentage point less than what you paid for it.

The spread covers the transaction and settlement costs borne by the ETN, as well as costs resulting from the demand dynamics in the local market vs the offshore market. However, as you are buying and selling in Rands, there are no currency conversion costs, which are usually between 2% and 3%.

How does it compare to EasyEquities EasyFX?

Comparisons have been made between the FNB ETN range and the EasyEquities EasyFX platform that allows you to purchase shares directly offshore for a low minimum. It is like comparing apples and oranges – both are fruit, but they are very different.

Both products solve the problem of accessing these expensive shares for a lower minimum investment. Considering that Apple is currently trading at $124, it would cost you around R2 100 to buy just one Apple share.

The FNB ETN solves this by tracking the share performance rather than owning the share, while EasyEquities uses Fractional Share Rights which allow investors to buy a fraction of the share they want to invest in.

Through the Easy Equities EasyFX platform, you convert Rands into US dollars or Australian dollars, so it forms part of your offshore allowance. You can then buy and sell the shares that are available on the platform and can have any proceeds paid to any offshore bank account – it does not have to return to South Africa.

Owning the actual share is more transparent that investing via an ETN as there is no way to calculate whether the ETN is accurately tracking the share price movement.

The main cost with the EasyFX platform is due to the currency conversion. There is a 2% currency conversion fee plus a 0.2% transaction fee (with a minimum of $4.60) to convert into the foreign currency. There would also be a cost to convert any proceeds back into rands if you did not want to leave the money offshore.

When you purchase the shares there is a total trading cost of 0.56%. However, there are no monthly admin fees. While there is no minimum amount, to optimize on fees you would need to invest around R25 000.

Further reading:

This article first appeared in City Press.

2 Comments

  1. Awesome and useful information

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  2. Excellent and empowering reading material

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Maya Fisher-French author of Money Questions Answered

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