Have you read the first part of our ETF series? If you haven’t or are needing a recap, here’s why Exchange Traded Funds are great!
Working for money isn’t your only option. The reward for successful budgeting is investing. Investing is a way to make your money work for you!
The big questions are “How do I invest?” and “What do I invest in?”.
Many people hand their money to fund managers by investing in actively managed unit trust funds. This isn’t a bad option! You’re entrusting your money to fund managers who will use their expertise, research and insight to select investments. However, historically, many active managers have not outperformed the general market over the long term and investors still had to pay fees – ouch! During the COVID-19 crisis, 72% of all active funds underperformed the general market (Source: Coreshares, Morningstar). If your unit trust’s returns just aren’t cutting it, it might be time to consider investing in ETFs.
ETFs are passive funds, which track the market or a subset of the market based on a predefined formula. As an aside, there are also passive (or index-tracking) unit trust funds but we will ignore those in this article.
ETFs are already diversified, often have lower annual fees than unit trusts, are traded on an exchange and typically have lower minimums. You can also buy and sell ETFs which track the performance of upcoming technology companies, real estate or markets in other countries (e.g. China, USA, Japan) – there’re loads of choices!
Let’s explore which ETFs you should choose.
Step 1: Decide on a ETF portfolio
In order to trim down the wide range of options, you need to decide why you’re investing (your goal) and the time horizon associated with that goal. See the table below, indicating which ETF portfolio you should pick based on your desired investment length.
Step 2: Where can you buy ETF?
1nvest, ABSA, Ashburton, Cloud Atlas, CoreShare, First Rand, Satrix and Sygnia are ETF providers. You can choose to open an account with one of these providers to buy and sell ETFs. Another way would be to open an account with a trading platform like Randswiss, Easy Equities, Sharenet or your bank’s own trading platform. A trading platform has all the ETFs listed.
Most of the providers above have self-service websites where you can sign up quickly and easily, others might be a bit more manual.
It’s also tax efficient to house your ETFs in a Tax-Free Savings Account which is available through some of these providers too – we’ve got you!
Step 3: Matching ETFs to your portfolio
All the possible ETFs available in South Africa are listed here. We’ve selected some ETFs which would fit into each portfolio below. These are just a few examples to give you an idea, but there are many others you could pick from.
1. Conservative ETF Portfolio
There aren’t many of these ETFs listed in South Africa, so with an investment term of under two years, it could be argued that a savings account earning you interest might be a better option.
2. Cautious ETF Portfolio
This would mostly be made up of Bonds ETFs with a small percentage in Property ETFs and World ETFs.
Bond ETF examples: 1nvest’s SA Bond or Global , Satrix SA Bond Portfolio, Satrix Global Aggregate Bond, Ashburton Inflation ETF.
3. Moderate ETF Portfolio
Similar to the Cautious ETF Portfolio, but a greater percentage of your money would be placed in Property ETFs and World ETFs.
4. Growth ETF Portfolio
With longer investment terms, you can consider investing in ETFs which track local and global equities and property.
Property ETF examples: 1nvest Global REIT, CoreShares Global Property, SA Property Income or the Sygnia Itrix Global Property.
World ETF examples: Satrix MSCI World, Sygnia Itrix MSCI World or 1nvest MSCI World.
5. Aggressive ETF Portfolio
In an aggressive portfolio, you add more focused (or less diverse) and hence more risky ETFs. These focused ETFs include Thematic ETFs. They typically focus on long-term, societal trends, such as disruptive technologies, climate change, or shifting consumer behaviours.
Examples of Thematic ETFs: Sygnia Itrix 4th Industrial Revolution Global Equity, Satrix MSCI China, Satrix Nasdaq 100, 1nvest S&P 500 Info Tech.
After reading this ETF blog series, we hope you feel better equipped to open an account and invest in the ETFs that will fit your investment horizon and your personal wealth creation journey.