A new investment opportunity is about to make a big impact in SA financial markets. Exchange traded funds (ETFs), though still in their infancy here, are very popular overseas and are growing rapidly.
An ETF is an open-ended fund that holds a basket of shares that passively tracks benchmark indices, such as the Dow Jones 30, the FTSE 100 or the Nasdaq. It is listed on a stock exchange and traded like any other listed share. The fact that ETFs are listed, coupled with their tradability, is what differentiates them from normal tracker funds, which tend to be unlisted and relatively untradable.
One of the main attractions of ETFs is their low cost to investors. Actively managed funds can be expensive and are becoming progressively more so as the complexity and range of actively managed products increases.
Active fund managers in SA earn about the same or sometimes less than their overseas counterparts, but the peripheral costs of financial advisers, linked investment service provider platforms, commission structures and kickbacks make these products expensive. The Economist of September 24 2005 states that in the US three-fifths of the costs go to the person who sells the product and the people who do all the work (the fund managers) get only two-fifths.
Then there are the internal undeclared fund costs such as transaction costs, market impact, transition or derivative trades that also detract substantially from the performance of a fund without the investor even knowing about them. These costs also depend on how much the fund manager churns (buys and sells) the fund.
But it's not about only the costs - the difference in performance between active and passive funds is often not worth the premium paid for active investment. After costs and in the long run, passive investing often gives a better performance than active investment. With the advance of technology, especially communications, global equity markets are becoming more efficient.
Seven ETFs exist in SA. Recently launched Itrix passively tracks the FTSE100 and the EuroStoxx 50 indices. Its local sibling Satrix, launched in 2000, tracks three local benchmark indices - the Top 40, the Financial 15 and the Industrial 25. Absa has two ETFs - NewRand and NewGold, which track rand hedges and gold bullion respectively. At present R9,2bn is invested in SA ETFs, with R6,5bn of this invested in Satrix.
The first ETF - the S&P 500 (called Spiders) - was listed in the US in 1993. Globally, at the end of September 2005, there were 400 ETFs, with 502 listings on 32 exchanges and a total market capitalisation of US$359,8bn, or R2,2 trillion, which is roughly the same size as the market capitalisation of the JSE.
JSE CEO Russell Loubser is upbeat about ETFs. "We launched Satrix products some years ago and the Itrix late last year. A huge amount of work went into launching Itrix specifically - it was ground-breaking stuff."
Interest in ETFs is growing and the first SA ETF conference will take place in Cape Town in May this year.
According to Merrill Lynch's Global Equity Research in March 2005, ETFs now provide more than 33% of the turnover of all stocks on the S&P 500 each day.
Last year, according to Morgan Stanley executive director of investment strategies Deborah Fuhr, global ETF assets grew by 46%. Most ETFs - 85% - are held by institutional investors.
Investing is rapidly becoming commoditised around the world. If ETFs take off in SA the way they have overseas, investors may soon have a listed, liquid, discounted "supermarket" of investment products. Specialists such as greengrocers still exist, but they have adapted to offer more up-market, personalised service. A similar situation may arise with investments, where the new, more efficient supermarkets will draw the bulk of the business and will be relatively impersonal. Active boutique fund managers will be the specialists in the delis. Both delis and supermarkets have their place, but the business landscape will change when the first Pick 'n Pay or Spar opens in the neighbourhood.
