Investors can diversify with passive investments

Investors using the Absa Investment Management Services (Aims) investment platform can now also include Absa Capital’s existing exchange traded funds in their porfolios.

This will allow investors to diversify their traditional portfolios—they can now blend actively managed unit trusts with ETFs in their retirement annuities and preservation funds—for example. This could have significant cost savings for investors and is the first time investors are able to use exchange traded funds as part of their retirement savings.

Sylvester Kgatla, head of product development at Absa Investments, says the range of ETFs include NewFunds Shariah Top 40 Index ETF and NewFunds eRAFI Overall SA Index, Financial 15, Resource 20 and Industrial 25 (the Overall reflects the Plexus Absa Capital eRAFI Overall SA Index, while the others track the underlying value indicators of companies).

In terms of how this will affect an investor’s pocket, let’s look at an example. If you have R250 000 and you have four funds in your portfolio (more might be over-diversification), you could invest R100 000 in a unit-trust fund and R50 000 into three ETF products, (keeping in mind that maximum exposure to equities cannot exceed 75% of the portfolio if you are invested in a retirement annuity or preservation fund.)

The costs will of course depend on the product. Say, for example, you are paying 50 basis points (0,5%) for the administration of a preservation fund or retirement annuity and 1,5% for a traditional equity unit-trust fund. Your total cost will be 2%. Now substitute the traditional equity unit-trust fund for an ETF with an annual fee of 0,50%, your total cost would be 1%. The ETF is not actively managed, so costs are traditionally lower in terms of administration.

With ETFs frequently outperforming their indices, it’s hardly surprising that companies are dangling the low-hanging fruit before clients—and when it comes to retirement planning, investors need to be canny or they can lose retirement savings that are not compounded if a fund underperforms by hundreds of basis points a year.

If you know your portfolio will benefit from ETF exposure (a lower total expense ratio, perhaps?), you’d probably be foolish not to include ETFs. But do remember that not all ETFs are alike and you’d be wise to do your homework before jumping in. Be clear about your expectations and goals, especially when it comes to retirement. And be aware of how much risk you’re willing to take on.

Above all, don’t just jump at ETFs because everyone’s doing it—you need to look at what kind of EFTs are best for you taking into consideration your investment goals. Seek professional advice from a financial adviser to ensure that you have a right selection of funds, which could be a mix of ETFs and conventional unit trust funds.

ETFs on Aims are available in the following products and can be mixed with traditional unit trust funds: NewFunds eRAFI Overall SA Index, Financial 15, Resource 20 and Industrial 25 will be available in the Aims Preservation Fund, Aims Retirement Annuity, Aims Investment Account, Absa Life Series (Endowment), while the NewFunds Shariah Top 40 Index ETF will be available in the Absa Islamic Investment plan only.

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