Passive investing allows investors a low-cost route to the equity market.
Because the investment usually tracks an index, there are no active management fees. However, investors still need to be astute to ensure they do not pay through the nose.
Exchange-traded funds (ETFs) are becoming increasingly popular, with nine ETFs listed on the JSE and two more coming on to the market next week. ETFs are open-ended investment portfolios that track an index by acquiring the underlying basket of instruments comprising that index.
ETFs are listed instruments so you buy them through your stockbroker. But are they as cost effective as one expects?
A stockbroking account incurs costs when trading and there are monthly administration fees. Depending on the broker, your fees to buy or sell will be between 0,7% to 1,25%, with a minimum cost of R70 in the case of Standard Bank’s Online Trading, which is the cheapest in the market, or they can be as high as R125.
If you wanted to buy R1 000 of shares in an ETF, your costs would be 7%. When you sold, you would incur a further 7% fee. If you bought R5 000 worth of an ETF you would pay between 1,7% and 2,4% both when you sold and bought.
There is a monthly administration fee for your account with a broker. The cheapest on the market is R50. If all you had in your share portfolio was R5 000, it would cost you 1% a month or 12% a year.
Buying ETFs through your broker is cost effective only if you purchase in large quantities — at least R60 000 — or if they form part of a larger share portfolio.
ETFs offer an excellent core portfolio holding and you can add certain stocks for potential out-Âperformance. But for the retail investor who wants to put some money away each month, going the broker route would be prohibitive.
For this reason some ETF players, such as Satrix, have created a retail client offering through their investment plans. You can invest lump sums of R1 000 or more or have a monthly debit order of R300. For the smaller investor this is more cost effective than going through a Âbroker, saving the upfront brokerage charge of 0,1%.
For a debit order there is an additional administration fee of R3,50 per debit order, which works out at a cost of 1,17% per R300. In total the monthly purchase cost for a debit order would be 1,27%, excluding VAT.
There is an annual management cost of 1%, which is cheaper than a broker for amounts of less than R60 000 and is substantially cheaper than an actively managed fund.
There also are index tracking unit trust funds such as those managed by Umbono Fund Managers. Umbono’s RAFI 40 Tracker fund weights shares according to valuation, rather than market capitalisation. Umbono has no upfront brokerage fees and charges 0,86% annual fee.
However, for smaller investors, Umbono’s 2,28% charge on debit orders of less than R5 000 is double that of Satrix. The minimum debit order is R500 and minimum lump sum is R10 000 compared with Satrix’s R300 and R1 000 respectively.
Satrix does not offer the RAFI index in its range.
Investec brings new offering to the market
On December 4 Investec listed its ETF range called Zshares.
Zshares RandPlay is designed to track an index developed by Investec to outperform the Top 40 when the rand strengthens against the dollar.
Companies in the index tend to be assisted by both low domestic interest rates and the associated improvement in domestic economic growth. Shares are selected from sectors that typically include retailers, banks and selected industrial companies.
The Zshares RandHedge is an ETF that tracks a RandHedge index. The ETF comprises stocks that benefit the holder from sustained rand weakness against the dollar and is designed to complement the RandPlay. These include companies that have a significant portion of their regular earnings base in foreign markets or that can improve their export earnings once the rand has weakened. — Maya Fisher-French