KIM GIBB: Good news as SA’s ETF market poised for growth

Initially off to a slow start, SA is beginning to see momentum in the demand for actively managed exchange traded funds (ETFs).

The SA market, though relatively young with just nine actively managed ETFs, is expected to expand rapidly. Ten more such funds are planned for this year, potentially doubling the market size. ETFs, both active and passive, saw new capital raised of R8.3bn in the first half of the year.

Early entrants in the actively managed ETF space expect this growth to continue, spurred by increasing interest from larger SA asset managers. This expansion will provide local investors with a broader selection of ETFs.

Unlike the US, the growth in the SA ETF market looks set to lean towards actively managed ETFs. This is largely because investors have the passive options covered via offshore funds and large established SA passive ETFs. Active managers have opportunities to explore new distribution channels through the ETF wrapper, and we are seeing them starting to take advantage of this.

Drivers of growth

Growth of the SA ETF market is fuelled by new asset flows, more launches and positive performance of global and local stock indices. ETFs offer fund managers a new distribution channel, with regulatory changes allowing active ETFs that appeal to segments of the fund management market that did not have a passive, low-fee option.

From a practical standpoint, SA ETFs operate similarly to their European cousins. Service providers such as Prescient can offer an end-to-end platform solution, from listing on the JSE to trading support. They can also serve as authorised representative in Europe as well as listing agent and fund administrator. Launching new ETFs in SA takes about six months and the listing costs are in the region of R150,000. The market, though small, offers ample scope for new entrants to make a name for themselves, especially active managers.

Changing investor sentiment

As more large fund managers enter the market we expect shifts in investor and fund manager sentiment, leading to further ETF sector expansion. Increased interest from foreign fund managers in the SA market is another trend to watch. A quicker route to market for these participants may be the launch of a local feeder fund into a Financial Sector Conduct Authority-approved offshore fund.

Like other markets, traditionally SA investment managers have favoured unit trusts due to their higher fee margins, but this is expected to change with the growing adoption of ETFs. Retail sector participation is expected to increase as ETFs trade like any other security on the JSE, accessible through share trading accounts.

Retail participation to drive growth

Retail participation will be a significant growth driver. We expect interest in actively managed ETFs offering “cash alternative” dynamics, especially those with a fixed income or money market offering. SA is experiencing a surge in stock market investing, fuelled by successful retail investment platforms.

If growth patterns follow those from other markets such as the US, we anticipate this will drive more inflows to ETFs due to their liquidity and ease of access compared to more traditional options.

Retail interest in stocks generally in SA was minimal before the pandemic when, according to the JSE, private investors represented only 3% of volumes. This has jumped significantly since 2021, with retail investors playing a bigger role in daily deal flow. As cash rates drop we also expect to see more appetite for higher yielding investment strategies in actively managed ETFs.

This retail adoption will take time but could lead to a snowball effect, especially as the variety of actively managed ETFs grows and well-known brands enter the market. While the number of actively managed ETFs trading in SA is still small, all the indicators are there for a sea change in the market over the next 12 months.

• Gibb is CEO of Prescient Management Company.