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An ETF (exchange traded fund) is an investment fund made up of several similar assets that you can purchase as a whole. ETFs are traded on an exchange just like stocks. This can best be described as purchasing a basket of eggs (the ETF), with each individual egg representing an asset such as a commodity, bond, or share.
What makes them so special?
When you invest in shares, there are a lot of decisions that need to be made, such as which companies or industries to invest in and how to best diversify your portfolio so that you are less affected by market fluctuations. Often, these kinds of decisions are best left to the pros.
An ETF does that work for you. You can choose to invest in one fund that will track a range of companies or assets that form part of your bundle so that your portfolio is automatically diversified.
ETFs can also be themed, for example, if you’re conscious of the environment, you can choose an ETF which invests in a range of environmentally sustainable companies.
The benefits:
- Investing in an ETF diversifies your investments since you’re exposed to many companies and different asset classes, like property, bonds, or equities(shares).
- Minimum investment amounts are low. Some providers let you invest as little as R5.
- ETFs are passively managed, meaning their costs are very low.
- You can purchase ETFs through your tax-free savings account.
Choosing an ETF
Here are some key points to consider:
Risk profile
There are four main asset classes: shares, bonds, cash, and real estate. While it’s essential to invest in a diverse number of shares, investors often aim to have a balanced investment portfolio, which usually includes all asset classes. Different classes have different risk profiles, so deciding how much to invest in which class depends on your own investment style, age, how long you intend to keep the investment open, and other factors.
Local vs offshore
You can choose to invest in the South African market and/or offshore. Although you can gain exposure to various industries by investing in a single ETF, it would be wise to consider a split between South African exposure, such as the JSE Top 40 ETF, and an ETF that tracks an offshore index, like the S&P 500.
Industry
You can choose sector-specific ETFs that focus on technology, finance or property. Certain industries are seasonal, performing better in some months compared to others. Consider this when choosing your fund.
Fees
When comparing two similar types of ETFs, with similar returns, the one with the lower fee will generally maximise the return due to the smaller expense ratio. An ETF’s total expense ratio (TER) is the total cost of running a fund. It includes management fees and additional costs like legal, trading, and audit fees. The TER is a percentage, calculated by dividing the fund's total costs by its total assets. A fund’s TER is an easy way to compare investment products.
Fund fact sheets
ETFs are always accompanied by a fact sheet that gives an overview of the fund. This gets updated each month and includes how aggressive the fund is, what investment period is ideal and what the TER is. If you are new to fund fact sheets, check out our Slice on learning to read a fund fact sheet and invest like a pro.
You can browse through the fact sheets of every fund that’s listed on the JSE.
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