Exchange Traded Funds at STANLIB
L eonard J ordaan
What are the main issues facing investors today, and how do exchange traded funds help in this environment? Returns among all asset classes are expected to be more subdued than in recent years. This has led to two significant developments: firstly, investors are looking for yield beyond the traditional asset classes and are starting to invest in alternatives such as infrastructure, private equity and hedge funds. Secondly, investors have become far more cost conscious and are aware of the impact of costs on their portfolio return. For this reason, where they don’t believe that an active manager adds significant value, investors are opting for lowcost passive products. Why are ETFs so important when building a portfolio? ETFs are arguably the lowest cost products available to investors. They offer diversified exposure to various asset classes and are relatively simple products. It is possible to blend ETFs with other investment products that offer investors some outperformance of the market. Who are ETFs appropriate for and how can financial advisers help? While passive investment does have advantages, the decision on which asset classes to invest in must be tailored to suit an individual’s risk profile and return requirements.This can be a difficult process as retail investors are often influenced by emotions, particularly fear and greed. It may result in being too aggressive or too conservative. A financial adviser is very valuable in providing an objective analysis for their client and structuring an appropriate portfolio, as they are able to remove emotion from the process.
What are the benefits of ETFs for investors vs. actively managed strategies? Most active strategies tend to be cyclic; that is, they may perform well or poorly relative to the market depending on the prevailing economic conditions. Passive managers aim to provide investors with the exact performance of the market, and so their performance relative to the index is consistent; it is not likely to under-, or out-perform, the market at any time. What are the risks of exchange traded funds? There are very few risks with ETFs as a product, but there are some risks with the service providers that operate the fund. The main risk is that the asset manager is unable to replicate the underlying index or does so at a high cost, as this can have an impact on the expected return that the investor will achieve. Replication of the index is not guaranteed and so the investor bares all of the risk of any mis-tracking. For this reason, it’s important that the asset manager running the fund has demonstrable ability and track record in indexation. There are operational risks that exist, but ETFs are highly regulated and generally these risks are mitigated as far as possible and are only likely to surface in very extreme conditions. How do you choose the weighting methodology for your ETFs? STANLIB’s current product range includes a variety of weighting methodologies. We don’t believe that any one methodology is universally superior to another, as a lot depends on the risk and return profile of the investor. Ultimately, our index team is able to track most indices very well regardless of their construction, and is equally open to so-called
‘smart-beta’ indices as it is to traditional indices. The fundamentals of index tracking as a function remain the same, regardless of the weighting methodology. What are the tax considerations for ETFs? If the fund is structured as a collective investment scheme, the fund itself will usually not incur any tax. Investors in ETFs will incur all of the tax that would be associated with capital growth and the receipt of income and dividends by virtue of holding the ETF units. Where do you see the ETF market in South Africa in five years? The passive industry is poised for growth. Its low cost structure is appealing to investors. ETFs are well positioned to pick up their natural share of the passive industry, and with growth in the type of the assets that ETFs may invest in, should increase this share. If international examples are anything to go by, the ETF industry in South Africa should enjoy substantial growth over the coming years. Our financial markets are well regulated, trading systems are world class and investors are increasingly taking greater responsibility for their savings. All of these factors give me confidence that while ETF growth has been unexciting until now, we really are going to see ETFs take their rightful place as a preferred investment vehicle in the near future.
If international examples are anything to go by, the ETF industry in South Africa should enjoy substantial growth over the coming years. investsa
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