Let’s start with the basics. ETF stands for Exchange Traded Fund. It is an easier way to assemble a balanced portfolio without having to do the share picking myself. I can do that by investing in an Exchange Traded Fund (ETF). An ETF looks like and smells like any other listed share however, it does not limit me to only one company. This is where the “fund” part of Exchange Traded Fund comes in. I am investing in a fund that owns shares in various different companies. So through buying a single share in an ETF I get access to the performance of let’s say 40 different companies – these are well known companies such as Anglo America, MTN, Old Mutual and FirstRand. The “exchange” part in Exchange Traded Fund means that the fund is listed on the JSE and traded in exactly the same way as any other listed company. An ETF is in many ways similar to a unit trust however, a Unit Trust is not listed on the JSE.
The companies that are included in the fund vary depending on the ETF. Some ETF’s consist of the 40 top listed companies on the JSE; some invest in companies that are typically known for paying out significant dividends; others invest in companies in the industrial sector of the market and some even invest in bonds making it an easy way to invest in that asset class. The RMB Inflation-X ETF delivered returns of 18.74% over the past year and by the way was also the winner of a Morningstar award for the best diversified bond fund in 2013.
So, the choice of ETF will depend on my appetite for risk – I will select the ETF that works for me. The top 40 ETF’s are great in that they track the performance of the 40 largest companies on the JSE. RMB MidCap ETF is the only one of its kind as it invests in the 41st to the 100th largest companies on the JSE. So if I am able to invest in all the top 40 and the next 60 companies I am in fact sharing in the performance of the top 100 companies on the JSE.
It’s important to note that unlike a Unit Trust, an ETF is not actively managed by the fund manager. An active managed strategy means that the fund manager is continuously buying and selling the holdings in the fund in an effort to maximise gains. Active fund managers come at a price and them outperforming the market is not guaranteed. The impact of such unnecessary costs has a severe impact on the performance of my investment. ETF’s are passively managed which means that the companies in which the fund is going to invest is determined upfront with very little if any changes over time. This means that it comes at a lower cost to me leaving more money to grow with the market.
Carin Meyer is COO and Head of Finance for FNB Share Investing. She started her career in banking in 2003 as a Senior Financial Manager at FNB. She is a qualified Chartered Accountant and has a masters degree in Financial Management.