Like to have had a 12.2% return on a JSE investment during the second quarter of this year? Well, you should have thought of wheat. It eclipsed palladium, which showed a 12.1% return. Another cereal — maize — was not far behind the shiny metal at 10.9%.
Chances are, though, that you didn’t even know you could put whatever spare money you may have after keeping Eskom alive into just one commodity.
Wheat, for example, can be traded using Standard Bank’s exchange-traded note (ETN), which performed the best for the quarter ending June, according to financial services company etfSA, which monitors the performance of exchange-traded products on the JSE.
There are now more than 100 exchange-traded products listed on the JSE which allow you to do this — invest directly in commodities, equities and bonds. These commodities include wheat, maize, precious metals such as gold, palladium and rhodium, base metals like iron ore; indices such as the top 40 companies on the JSE plus other global indices like the Ashburton Global 1200 Equity and S&P 500; as well as the Ashburton World Government Bond.
Tech investors are catered for. Sygnia’s fourth industrial revolution ETF invests in companies globally that are driving technological change, be it in robotics, machine learning or artificial intelligence.
And if you think US treasuries are a safe bet — as many investors do right now because global uncertainty is on the rise — you could put some directly into US-issued bonds through FirstRand’s dollar custodial certificate.
Best of all, the fees are bargain basement, starting at just 0,1% a year. Unit trust fees, which start at 1.5%, are 15 times higher.
Exchange-traded products allow investors to be narrowly focused on just one commodity such as wheat or a suite of companies.
No long-term commitment is required, as is the case with equities, so investors can enter and exit these investments while markets are open.
The exchange-traded products industry has grown from R16,4-billion in 2008 to R91,3-billion in mid-2019, a compounded annual growth rate of more than 40%, says an eftSA report, State of the South African Exchange Traded Product Industry.
An exchange-traded fund (ETF) is a listed investment product that tracks the performance of a group or a basket of shares, bonds or commodities, according to the JSE’s website. “An ETF can own hundreds or thousands of stocks across various industries, or it could be isolated to one particular industry or sector.”
These exchange-traded products are issued by 12 parties on the JSE, including Absa, Standard Bank, investment fund company Satrix. They include 78 exchange-traded funds and 27 exchange-traded notes, where an ETF is a fund that owns physical assets and an ETN is a promissory note linked to the performance of an asset such as gold.
Nerina Visser, strategist and adviser at etfSA, said exchange-traded notes bring credit risk because they are based on whether the bank that issues the note can pay out what it has promised. This differs from exchange-traded funds where the return is based on the performance of the underlying assets held in the fund.
Both can be considered as a good investment, depending on individuals’ goals, said Visser. But exchange-traded funds are the more dominant and popular exchange-traded products.
etfSA’s performance survey for the second quarter of 2019 included 78 local exchange-traded funds. Top performers include Standard Bank’s Africa rhodium with 68.55 % growth over three years, Absa’s NewGold palladium with growth of 38.47% over two years, and asset management investment fund Sygnia’s Itrix MSCI US ETF, which has shown annual growth of 20.08% over 10 years. The exchange-traded fund tracks the performance of the large and middle capitalised United States companies.
Other popular ETFs include the Satrix Top40, the CoreShares Top 50 and the international S&P 500.
“Like with everything in life, the whole point of an ETF is to keep things simple and just track the market,” said Byron Lotter, the fund manager at Vestact.
The difference between an exchange-traded fund and a mutual fund is the latter has someone managing the investment product.
Visser said: “With a unit trust there is an active stock — a person who sits on a day-to-day basis and decides which companies to buy or sell and so obviously the cost of a unit trust has to include the cost of the active manager. In the case of an ETF and ETN, the index is a recipe that says which companies must be bought and how much of them. There is no fund manager who needs to be paid to make those investment decisions. That is why they are cheap.”
Exchange-traded funds have, in some cases, been out-performing equities and other investments.
“Locally, JSE’s top 40 ETFs have outperformed most stock pickers for the last three to four years. Stock picking has been very difficult in South Africa because a lot of the previous darlings of the JSE such as Aspen, Mediclinic, EOH and Steinhoff had very tough years — so it would have been better to track the index,” said Lotter.
Visser said potential investors need to pay three fees when acquiring an exchange-traded product. These are: the product cost, which entails the cost of putting together an exchange-traded fund and is referred to as the total expense ratio; the transaction costs, which is the cost of buying them and can differ depending on the service provider; and an advice cost, which is only necessary when investors needs advice about where to put their money
Lotter said the difference the low fees make in the longer term is “massive” but added that the return will depend on how long you invest for and how much your investment grows. “You got compound growth and fees have an impact on that in a compound manner. The difference in fees, if you quantify it in rands at the end of your investment period, will be massive.”
Exchange-traded funds were first listed on the South African market by Satrix in 2000. Globally, the first ETF was created in 1976 under an index fund by investment firm Vanguard Group. Forbes magazine reported the fund was started by John C Bogle, the father of passive investing, who “believed that it was far more important to stay invested than to trade in and out, so he created a fund that tracked the S&P 500”.
Bogle’s creation was considered “folly” because “Wall Street at the time (and even today) was invested in the idea of beating the market and Bogle knew that most active managers can’t do it, and even less so after subtracting their fees”, Forbes reported.
Lotter shared these sentiments. “Research has shown that, over many years, 90% of stock pickers do not outperform the index. So the moral of the story is to buy the index and track the market. You do not have to apply your mind to it — basically the ETF tracks the index with low fees,” he said.
Tshegofatso Mathe is an Adamela Trust business reporter at the Mail & Guardian