Exchange traded funds laid bare
ETFs or exchange traded funds, are popular investment products and are widely used by professional as well as private investors.
But what are they?
The best way to explain an ETF is by the use of the word “basket”.
ETFs are listed investment products that track the performance of a group or basket of shares, bonds or commodities.
Most ETFs track an index, such as a stock index or bond index and can be bought or sold in the same way as an ordinary share.
For the new or inexperienced investor, ETFs are an excellent starting point, because of the diversification they offer.
By owning a basket of shares you are essentially “spreading risk” across an index.
You gain exposure to a wide variety of securities or assets without having to do extensive research.
The Satrix40 ETF, for example, is a basket of the Top40 shares on our stock exchange and it is bought and sold just like any other share.
This ETF then tracks the performance of the entire Top40.
So what have you achieved here?
Well you have avoided buying each individual stock to the exact size and weight they each carry in the index.
The ETF does it all for you and all these stocks are grouped together and priced as one thing, the Satrix 40 in this case.
So if the index is trading at 43 580, the Satrix40 would trade at around R43,60, for example.
There are a variety of exchange traded baskets (funds) for investors to choose from and what makes them attractive is that they are a relatively low-cost product to invest in.
ETFs are also exempt from securities transfer tax (STT), which is a standard tax on most shares.
Depending on the ETF you choose, they also pay investors dividends when the underlying instruments held in the ETF pay dividends.
So, not only do they offer potential capital growth, but also income via cash dividends.
On our market, there are ETFs listed that range from Top40 and international shares to bonds, commodities and money market instruments, as well as local and international property funds.
With ETFs you could buy funds that track the American S&P 500 share index through a listed tracker fund.
These kind of tracker funds allow you to do the same for the UK, European and even Japanese share markets.
If you feel like owning shopping malls and office blocks in South Africa, all you need to do is buy the corresponding ETF.
In this case it’s the FTSE/JSE South African property index.
The point is, with ETFs you can cast your investment net much wider and reduce risk, while simultaneously stretching your investment capital a lot further.
There are ETFs that exist for just about any type of investor.
How do you get to invest in ETFs?
• Open a brokerage account with an authorised broker
• Use a platform that allows investors to purchase ETF products from different issuers.
Easy as that! I am always available to help and guide my readers in the right direction, so get in touch if you need advice.
Benoni resident Roberto Pietropaolo, or “Robby P”, as he is known in the financial markets, is committed to educating you on financial wellness, investing, and general money matters.
He works for Unum Capital as a trader, investor, mentor and tutor.
He specialises in trading the short term derivatives market and longer-term equity or share market.
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