Words on wealth: ETFs 25 years on – will they displace unit trusts?

Exchange-traded funds (ETFs) launched in South Africa in 2000, 25 years ago. Although their growth was initially slow compared with the United States and other countries, the local industry is now expanding rapidly, especially since the introduction of actively managed ETFs (AMETFs) in 2023. Will ETFs, in the years to come, displace unit trust funds as the instrument of choice in the collective investments space? There’s a lot going in their favour.

A recent conference in Cape Town hosted by Prescient, which spelled out its vision for the future of ETFs in its publication “ETF Evolution: Insights into South Africa’s Investment Landscape”, provided valuable insights into the ETF market and its increasing popularity.

Essentially, it comes down to democratisation, ease of access, and low barriers to entry. Unit trust funds, known overseas as mutual funds, were the first step in this democratisation process. 

The unit trust landscape

The first unit trusts, offering a basket of assets within a pooled investment, appeared in the mid-1960s and quickly caught on among people who could not afford to invest directly in the financial markets. Unit trust management companies flourished in the last quarter of the 20th century and into the new millennium. From a handful of funds in the 1970s, there are over 1,500 funds in South Africa today. The vast majority of them are actively managed, meaning the fund managers and their teams of analysts research and choose the underlying assets, such as shares and bonds. 

Unit trusts were relatively easy and flexible to invest in, either directly with the management company or on an investment platform offering funds wrapped inside products such as retirement annuities. This was the era of the rise of the current giants of asset management, including Allan Gray, Coronation, and Ninety One (formerly Investec Asset Management).

ETF revolution

In 2000, a new kid on the block, Satrix (now fully owned by the Sanlam group), launched a revolutionary new type of investment product. The Satrix 40 ETF traded on the stock exchange like a company share and tracked the FTSE/JSE Top 40 Index by holding the top 40 shares on the JSE in the same proportion as the index. No active management was necessary: investors simply received the return of the index, meaning the costs were kept low. Index-tracking ETFs quickly increased in number and became more diversified, but, for many years, never seriously challenged the dominance of the unit trust. 

Changes to financial legislation and JSE listing requirements and a relaxation of foreign exchange controls all contributed to the growth of the local collective investment industry, but two things, in my view, have tilted investing in favour of ETFs: the first was digital technology and the rise of the smartphone; the second was the birth of the AMETF, which is like an actively managed unit trust but in an ETF format.

Mike Brown, who headed Satrix in its early days and who now heads the ETF investment platform ETFSA, gave the delegates at the Prescient conference a breakdown of the state of the exchange-traded product (ETP) industry, which includes exchange-traded notes (ETNs) and actively managed certificates (AMCs). (ETNs and AMCs are similar to ETFs in that they trade on a stock exchange, but acting as promissory notes – the investor does not own the underlying assets.)

Brown said assets under management had grown over 100 times in the 25 years, from R2.7 billion at the end of 2000 to R284.6bn today. The price of the Satrix 40 ETF, which opened at R1, was now over R100. There are 284 ETPs on the South African market, more than double the number available just five years ago. Comprising 90 ETFs, 93 ETNs, 71 AMCs and 30 AMETFs, they cover a broad range of local and offshore assets and offer diverse investment strategies. Over half of assets (55.1%) are offshore and almost 20% in single-commodity ETPs, such as those holding gold or platinum. Satrix remains the biggest player, with R88.6bn of assets under management, although it has yet to launch any AMETFs.

Advantages over unit trusts

Nicola Comninos, chief investment officer and chief risk officer at the Purple Group, which runs the EasyEquities online share platform, told the conference that ETFs were better suited to the digital era than unit trusts and, now that they included AMETFs, represented the future of collective investments. The trend towards ETFs was especially apparent among younger investors, who could invest in real time on share trading apps on their smartphones. 

Comninos says ETFs are so popular because they are:

• Diversified: like a unit trust, an ETF gives exposure to many companies, sectors, or bonds, all in one trade.
• Cost-effective: fees are often lower than traditional unit trusts, especially for passive ETFs.
• Easily traded: you can buy or sell ETFs during market hours on the JSE, just like shares.
• Transparent: most ETFs publish their holdings daily or regularly – there are no hidden surprises.
• Regulated: Like unit trusts, ETFs in South Africa fall under the Collective Investment Schemes Control Act and are regulated by the Financial Sector Conduct Authority. “ETFs are also regulated by the JSE, offering investors two layers of protection and regulation,” Comninos says.
• User-friendly: ETFs are available to all investors with share-trading accounts.
• Without minimums: Unlike unit trusts, ETFs require no minimums on lump sums or monthly debit orders.

* Hesse is the former editor of Personal Finance.

PERSONAL FINANCE