Episode 010: JSE Listed ETFs – What’s really out there?

Hello again, investor!

So, you are interested in investing in ETFs right? But now, you are facing the issue of what ETF to choose, why, when and with whom to invest. I am writing this blog entry so that I can give you a nice summary of what is out there and hopefully it can help you.

Wait, what’s an ETF again?

ETF stands for Exchange Traded Funds, so essentially it is a fund that is made up of a basket of shares (or other instruments in other asset classes like bonds) and that basket of shares has been created to track the performance of a particular index (e.g., the JSE Top40, or MSCI World Index). As per the name says, this Fund is then wrapped up into 1 instrument and is listed in an Exchange like the Johannesburg Stock Exchange (JSE). You can trade in and out of this fund the same way you would trade an actual listed share, hence it’s an exchange traded fund.

Who are the issuers of JSE listed ETFs?

There are 7 major issuers in South Africa that have listed their ETFs at the JSE and investors have 95 ETFs to choose from. Satrix is the biggest issuer (around 36% market share), with 36 ETFs with a market value of around R52.6Bill. Next in line is Sygnia with 14 ETFs (value of R42Bil) and then Absa with their 3 commodity ETFs with a total market value of R24.5Bill. The rest are 1nvest (16 ETFs), 10X (14 ETFs), FNB (5 ETFs) and Prescient (7 ETFs).

What type of indices do these ETFs track?

The major asset classes that are out there are Equities, Cash (Money Market), Fixed Income (Bonds), Commodities, Real Estate, etc. The other dimension to this is that the asset type can be either Domestic (meaning it’s locally based) or it can be Offshore/Foreign meaning that its original pricing is outside South Africa. On top of this, asset types can be mixed and another product level is created, which is called a Multi-Asset index; which can come as a mix of just Domestic indices or Foreign indices, and it can also be a mix of the two.

The major indices tracked by these ETFs are indices created by FTSE/JSE, Refinitiv, S&P, MSCI, Nasdaq, Reitway etc.

Right, lets go through the list

When it comes to ETFs, South Africans love Foreign based ETFs, Foreign Equities to be more specific, as half of the total ETF market cap is Foreign Equities. See table below:

The 40 Foreign ETFs track indices like the MSCI world, MSCI China, S&P 500, Nasdaq, 4thIR, MSCI Emerging Markets and so on. In as much as there’s a lot of choice for investors, there is also some repetition from what is offered. For instance; Sygnia, Satrix, 1nvest, 10x – all of them have an S&P500 ETF and also Sygnia, Satrix and 1nvest have an MSCI World ETF. These ETFs tend to be a bit expensive with the highest expense ratio of 0.95% from the Prescient Actively Managed Global Property ETF and the cheapest being the Sygnia S&P500 at 0.20% TER.

Next in line, are domestic equity ETFs, with 29 ETFs on offer. These tend to be the cheapest ETFs, with the Satrix Top 40 ETF at 0.10% and the FNB Midcap ETF at 0.59%. There is a lot of choice here, from getting exposure in listed Property stocks,  Resource stocks, high dividend stocks and some Smart Beta exposure.

There are not a lot of Commodity ETFs listed on the JSE, yet the 7 of them account for 29% of the listed value of our local ETFs. Absa is the main issuer, with one of the biggest ETFs in the country – the Absa New Gold ETF and New Platinum ETF that has R7Bill in assets under management (AUM). The rest are the Palladium and Rhodium ETFs issued by 1nvest.

The rest comes mostly from Fixed income assets, with 5% coming from Domestic bond ETFs and 1% from Foreign Bonds and the small holdings coming from Money Market and Multi-Asset ETFs.

The biggest ETFs by AUM are as per below:

Shopping around for ETFs? Here’s what to consider

It’s always best to look at ETFs as building blocks for your overall investment strategy/portfolio. So you don’t buy an ETF mainly because you “heard of it”. Having “a lot” of ETFs in your portfolio doesn’t guarantee you the best strategy as well, especially if there is a lot of overlap in your exposure.

Avoid overlap:

• This is incredibly important, because you might go on a shopping spree and end up having the Sygnia MSCI World ETF and the Satrix MSCI World ETF in the same potfolio, I am pretty sure you never go to the shop buy the same exact two shoe pairs!  If you intend to buy an ETF that tracks the MSCI World index, consider that the ETF is over 60% in US based stocks, so ETFs that track indice like the MSCI US and S&P 500 might give you a lot of overlapping exposure to the US market.

• The Satrix Top 40 ETF is almost 95% of what you get from the Satrix CAPI ETF, while holding any Top 40 ETF from any issuer and also holding the SWIX 40 ETF is a complete waste of your exposure.

• To skew away from just getting market exposure in the domestic equity market, consider exposure to the Sector ETFs, Property ETFs and the domestic commodities. Going offshore, a lot of the ETFs have high exposure to the US markets and to move away from it and diversifying your portfolio – consider Emerging Market ETFs like the Satrix Emerging Market and the country focused ETFs that track India, China, US, Euro and Japan.

Diversification & Risk:

It’s always best to not put all your eggs in one basket, this applies to investments as well – as it helps you to diversify your portfolio. In the last 3 years, in Rand terms – China equities have lost by 12% per year, while India contributed 20% per year. SA Bonds have added 7% per year in the same period, while the All Share index added 14% per year. The difference in returns of these different asset classes shows why diversification is important. Consider your risk tolerance and with that also consider how long you want to be invested as the riskier assets tend to have a lot of short term volality with good long term returns while less risky assets tend to have low volatility but steady lower returns.

Fees:

• The first important acronym you need to know here is T.E.R, which stands for Total Expense Ratio. You will find this number in every ETF factsheet. It basically tells you how “expensive/cheap” an ETF is and is basically the percentage of the daily NAV of the ETF and is calculated over a period of 3 years on an annualised basis. The Transaction Costs (TC) for ETFs sit outside that number and to get the Total Investment Cost (TIC) you add the TER and the TC.

• The below chart highlights the distribution of TERs across the 95 listed ETFs and you can see that most ETFs range between 0.24% and 0.52% while there are not a lot of ETFs that are on the expensive side.  There are a few ETFs which are very cheap, which what I highlighted above.

• The TER is very helpful as well in choosing which ETFs especially when you are looking at 3 or 4 issuers that have the same ETF. The lower the TER the better the costs on your investments.

Well, that’s it for now! I hope you found this informative and it will help you understand the South African ETF market a little bit better.

Signing off!

Siya-The-ETF-Guy