An ETF is defined as a listed investment product, which tracks the performance of a particular index by physically holding the assets which underlie the index. ETFs are traded on an exchange just like an ordinary share and the price of a particular ETF will be determined by the demand and supply of the ETF.
When it comes to simplicity, one of the best investment products you can own is one that automatically invests in the top shares on the stock market, or if you prefer, some ETFs focus on certain segments of the stock market such as the top property, financial, resource and international stocks for instance. These are just a few of many segments you are able to invest in.
Despite the stock markets impressive long term growth, there are many fund managers who believe they can outperform the market by selling or buying stocks when the market rises or falls. This is known as active investing and costs more. According to the latest research only one out of five active fund managers manage to beat the market over the long term.
Exchange Traded Funds don’t try to do better than the market, but because of their lower costs they often end up beating the funds that try.
Benefits of ETFs
Easy to acquire
Investors can gain exposure to a wide variety of securities or assets without having to buy each of the underlying constituents individually, conducting extensive research, nor actively managing the underlying securities.
By purchasing a single ETF, investors receive immediate exposure to the performance of a wide variety of the top performing securities within an index thereby avoiding the risk of putting all your eggs in one basket by having to buy each of the underlying constituents individually which requires complex and time consuming activities like research and actively managing the underlying securities themselves.
Peace of mind
ETF are well regulated by both the Johannesburg Stock Exchange (JSE) and Financial Services Board (FSB) ensuring that investors are protected against unjust treatment.
Investors are eligible to receive dividends should the securities in the index pay dividends. Investors may elect to receive, or reinvest dividends.
Unlike owning a single shares and having to search for a willing buyer if you wish to sell your share, ETFs can immediately be bought and sold on any day the stock exchange is open.
Unlike purchasing a single share, ETFs are exempt from Securities Transfer Tax (STT).
Besides the price of the ETF itself, there is a once off trading fee for the transaction when
the ETF is bought or sold. Annual administration fees will also apply.
Share ownership rights
Owning an ETF does not give investors the right to vote at Annual General Meetings (AGMs) of the underlying securities, as you own a portion (unit) in the ETF and not the underlying securities themselves.
Capital gains (profits) from the sale of an ETF are subject to Capital Gains Tax.
The purchase price of an ETF will always vary slightly from the selling price (aka the net asset value or NAV of the underlying fund). This difference is attributable to the funds management costs and market forces such as supply and demand.
ETF prices fluctuate, as do the prices of its underlying securities. However, because of the advantage of diversification, the risk of losing money is lowered.
TYPES OF ETFs
Track the performance of general, sector and international equities.
Track the performance of nominal, inflation and government bonds.
Track the performance of property shares listed on the JSE.
Track the spot price of a commodity.
Money Market ETFs
Track the performance of short term money market deposit rates.