Exchange Traded Funds (ETFs)
Overview
We are going to discuss another avenue used for investing called Exchange Traded Funds (ETFs).
We will define ETFs, consider their features and understand who generally invests using these instruments.
Defining ETFs
Exchange Traded Funds or ETFs are listed investment products that track the performance of a group or "basket" of Shares, Bonds or single Commodities. These "baskets" are known as indices. An illustration of an index is the FTSE/JSE Top 40 Index.
An ETF can be purchased or put up for sale in the same way as an Ordinary Share. Investors save time and money as ETFs enable an investor to invest in a variety of asset classes through a single listed investment product, at a fairly low cost.
ETFs are essentially a hassle-free way to achieve entrance into the market and it is not necessary for extensive research into each and every underlying asset of the ETF. You can achieve a diversified portfolio without the administration hassle of a large portfolio and the cost associated with it.
What’s more, if a share within the fund declares a dividend you will be entitled to it proportionally as a unit holder. Some ETFs do automatically re-invest these dividends back into the fund which means the effects of compounding are put to work in your favour too.
Who are ETFs For?
ETFs are used by both professional and private investors wishing to gain exposure to different sectors, asset classes – both locally and globally.
They are the ideal investment vehicle for those who are new to the world of investing and are a great starting place for many individual investors who are looking to build a share portfolio.
There are many benefits to starting with these instruments in your portfolio until such time as you feel you have the necessary tools and skills to expand your investment journey.
Features of ETFs
ETFs have several features:
- Provides exposure to a variety of underlying instruments i.e. it offers diversification.
- Can be bought and sold quickly, at a low cost.
- Are hassle free; you gain exposure to a wide variety of securities or assets without having to do extensive research.
- Are well regulated by the JSE and the FSCA.
- May pay investors dividends when the underlying instruments held in the ETF pay dividends (not applicable to all ETFs).
- Are exempt from securities transfer tax (STT).
- Most JSE listed ETFs also Tax-Free Savings Account (TFSA) compliant
- ETF prices fluctuate, as do the prices of the ETFs’ underlying instruments. However, because of the advantage of diversification, the risk of losing money is spread out.
How to Get ETFs
There are several avenues that you can use to invest using ETFs:
- Open a brokerage account with an authorised JSE Equity member.
- Open an investment plan or use an online ETF platform, with an ETF provider or financial services provider (FSP). This way, you can easily buy ETFs with a monthly debit order or a single lump sum investment.
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