An Exchange Traded Fund (ETF) is an investment fund which provides investors with access to a basket of shares traded on a stock exchange. This means you can buy one product which consists of multiple shares.
ETF’s generally track an index or a part of an index. A well-known ETF for example would be the Satrix 40, this ETF consists of the top 40 shares on the JSE. If you have bought the Satrix 40, you have invested parts of your money into the biggest 40 shares on the JSE, and you therefore own a little piece in all 40 companies (you become a part-owner).
For a complete list of share-based ETF's available for investing in South Africa, please visit the ETF Glossary page on this website.
History has proven that the single best place to put your money for long-term investing is the stock market - no matter how much you like property or gold this has been the case and there is plenty of research to back this.*
Because of its volatility it is also one of the riskiest investments. In this context risk means that if you are patient enough, have a long-term approach, diversify yourself appropriately and avoid all the noise, you are likely to get the best returns over the long-term.
Since ETF’s track and index or a slices of an index the money you invest into them will always perform exactly the same as the indices they track (with some slight variation depending on the index provider). Fund managers who manage unit trusts will always speak to a benchmark against which they are competing. It is their goal to give you a return higher than the benchmark they are competing against. If they are investing 100% in JSE shares their benchmark may be the JSE All Share Index. The scary thing is that only 15% of fund managers in South Africa can outperform the index they compete against over 3 years, and this gets worse the longer they try (see here). Good luck trying to pick the correct 15% every few years!
ETF's provide you with instant diversification. This means your investment has exposure to many different assets, and significantly reduces your risk. A great example of this is the Sygnia Itrix MSCI World ETF this is a great way to get offshore exposure in 23 countries tracking 1636 companies. This means that if you invest R100 into this ETF, you are investing R1.98 into Apple, 91 cents into Facebook and 70 cents into Google and so on for hundreds of companies. If one of the hundreds of companies in your ETF has a horrible year and their share price tanks your investment will hardly be affected because you are so well diversified.
ETF’s are cheap. We are talking fees way under 1% per annum. The Satrix 40 I spoke of earlier has a total expense ratio (TER) of 0.10% per annum and the STXWDM has a TER of 0.35% per annum. If we look at unit trusts the fees are considerably more expensive. The Allan Gray Equity Fund has a TER of well over 2% per annum and many other fund managers’ investment funds are even more expensive. Someone needs to pay for all their salaries I guess. Fees have a massive impact on your investment return over time.
You can buy ETF’s in tax free savings accounts. The long term benefits of investing in a tax free savings account are substantial. Best of all you don't need to worry about tax when it comes to selling investments or withdrawing money from the account.
These are just some of the reasons why I would recommend that anyone wanting to save and grow their money include ETF’s into their larger investment porfolio, make use of the tax free savings accounts, and become serious ETF enthusiasts for their friends and family like me.