Investors should compare tracking errors before investing in ETFs
Analysis of South African and international exchange-traded funds surprisingly shows the extent of the tracking errors exceeded the average total expense ratios
Exchange-traded funds (ETFs) have become popular investment instruments over the past decade, globally and in SA. Since the first ETF was listed on the JSE in 2000, the popularity of this financial product has expanded exponentially. In December 2018, locally listed ETFs had a market capitalisation of R77.8bn, compared with R42bn in December 2012. The underperformance of active managers and low investment management costs have contributed to the growth in demand for passive investment products. ETFs have been a beneficiary of this trend as the expense ratios of ETFs tend to be substantially lower than those of more traditional index-tracking unit trust funds. ETFs are pooled investment vehicles that trade on a stock exchange in the same manner as shares. These ETFs are structured to replicate the performance of an underlying domestic or international equity, sector-specific, or style-based benchmark index. ETFs therefore have the ability to provide retail investors with low-cost, p...
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