The JSE’s number of exchange-traded funds (ETFs) has grown by 12 so far in 2018, taking the total to 74.

Sygnia has overtaken Sanlam — which owns the Satrix range of ETFs — as the second largest player in the local exchange-traded product market, and is rapidly gaining on Absa’s lead, etfSA.co.za MD Mike Brown said in an industry update e-mailed on Wednesday.

The number of exchange-traded notes (ETNs) trading on the JSE has remained constant at 20 this year. Exchange-traded products is an umbrella term for ETFs and ETNs. The two differ in that ETFs have to own the underlying commodities, share portfolios or whatever they represent, whereas ETNs do not.

"A JSE-listed ETF has to be 100% physically covered at all times, through the exact replication of the index being tracked, so tracking error and volatility is minimised. An ETN does not require full replication, which puts recourse on the creditworthiness of the ETN issuer. In an ETF, where all liabilities are fully covered at all times, the issuer’s creditworthiness is not material," Brown said.

Absa remains the largest player in the local exchange-traded product market, offering 18 ETFs and five ETNs with a combined R25.8bn assets under management.

When Sygnia acquired Deutsche Bank’s range of foreign blue-chip tracking ETFs in June 2017, they had less than R12bn assets under management.

"The current market capitalisation of the Sygnia Itrix ETFs is now R18.7bn, just one year later, a gain of more than 55% in a short period of time. Undoubtedly, Sygnia Itrix has brought new energy and impact to the ETF market in SA and their progress in becoming the dominant player in the industry will be watched with interest," said Brown.

The government has started encouraging South Africans to invest in ETFs holding diversified portfolios of stocks and bonds via tax-free accounts (TFAs). Unlike pension funds, which are forced to invest mainly in local shares, TFAs can be made entirely of foreign blue chip tracking ETFs.

However, exchange-traded products representing gold, platinum and other individual commodities are deemed too risky for TFAs.

"Absa has always benefited from large institutional investment in its commodity-based ETFs. But NewGold, for instance, now has a market capitalisation of only R12.5bn, compared with more than R20bn in 2012. The same decline in market capitalisation has occurred for the platinum and palladium based ETFs," Brown said.

"In December 2012, NewGold had more than 150-million ETF securities listed, this has now fallen to 77-million shares listed at June 29 2018, a drop of 49% in the shares in issue."

Satrix, SA’s oldest ETF manager launched by the JSE in November 1999 and subsequently sold to Sanlam, has, after many years of inactivity, launched seven new ETFs this year.

"Stanlib has also been active in issuing new ETFs in the first half of 2018. It has listed five new ETFs, all tracking global indices and using iShares ETFs as the feeder funds for its local listings. This method, now also used by CoreShares and Satrix, simplifies the creation and redemption process and helps manage costs efficiently," Brown said.

ETFs have traditionally been synonymous with passive investment, tracking market capitalisation-weighted indices compiled by FTSE, S&P, MSCI and other data providers, which were originally created to compare the average performance of different stock markets.

With the market for traditional index-trackers saturated, product providers have started selling "smart beta" products, which claim to beat the tried-and-tested market cap weighted portfolios.

Said Brown: "There are 13 listed smart-beta ETFs in SA, with a total market capitalisation amounting to R3.5bn at end-June 2018. ETFs that track future dividend payments or historic dividend consistency, are the most popular smart-beta products, accounting for 58% of all funds invested in smart beta ETFs."