Local investors don't have to convert rands into dollars to gain exposure to offshore markets. Picture:GETTY IMAGES
Local investors don't have to convert rands into dollars to gain exposure to offshore markets. Picture:GETTY IMAGES

Increased choice and competition are reducing the cost of easy-to-use index-tracking offshore investments.

After many years of a relatively narrow range of seven exchange-traded funds and index-tracking unit trust funds - offering low-cost exposure to offshore markets without having to convert rands into foreign currency - five new funds have launched over the past year, including three Satrix ETFs with a low targeted cost of between 0.25% and 0.4% a year.

The Satrix funds track the Morgan Stanley Capital World index, the MSCI Emerging Markets Investable Market index and the S&P500.

And the Financial Services Board and the JSE are processing a number of applications for new ETFs tracking offshore indices.

Among them are applications from Sygnia, which last month took over Deutsche Bank's five ETFs - the db X-trackers - that were for many years the only rand-denominated ETFs offering exposure to major equity market indices around the world.

Approval sought

Sygnia CEO Magda Wierzycka has applied for regulatory approval to launch five more offshore and three local index trackers. She has also undertaken to reduce the cost of investing in the db X-tracker ETFs.

The db X-trackers - to be renamed Sygnia Itrix ETFs - track indices representing the global (MSCI World), US (MSCI USA), eurozone (Euro Stoxx 50), UK (FTSE 100) and Japanese (MSCI Japan) equity markets.

The two best-performing db X-tracker ETFs, MSCI World ETF and MSCI USA, have returned 19.25% a year and 22.91% a year over the past seven years to the end of June, according to the ETF investment platform etfSA.

Investors have some R11.3-billion invested in these five ETFs.

Wierzycka told investors recently that Sygnia had applied for approval to launch an ETF tracking the S&P500 index and the S&P Global Property 40 index, competing with the two ETFs introduced to the local market by CoreShares just seven months ago.

Sygnia has also applied for approval to launch an ETF tracking an emerging-market index, competing with one of Satrix's newly launched ETFs. Sygnia's fourth new ETF will track a global bond index.

Sygnia will target a total expense ratio of 0.2% for the S&P500 ETF, 0.25% for the property and bond ETFs and 0.35% for the emerging market ETF.

The fifth offshore market ETF that Sygnia plans to launch will track a blend of 13 different indices of shares of companies involved in new technologies, digital and biological practices.

This comes after Sygnia launched a "fourth industrial revolution" unit trust in November last year at a total expense ratio of 0.8%. The targeted total expense ratio of the new ETF will be 0.7%.

Wierzycka said Sygnia wanted to compete head-on with other providers of ETFs tracking South African indices, with a Top40 ETF and a Swix40 ETF, tracking the top 40 shares on the JSE, and an All Bond ETF, tracking local government bonds.

Regulatory changes have allowed new players to offer similar products to the db X-trackers by exempting ETFs tracking offshore indices from foreign asset swap limits imposed on managers.

More price cuts coming

As new players are competing on price, Sygnia cut its costs and Wierzycka promised further reductions in future.

She advised investors that if they switched their db X-tracker ETFs to the Sygnia investment platform, the platform administration fee would be 0.2% for investments below R2-million and 0.1% for R2-million or more.

Investments in db X-trackers only, without investments in ETFs from other providers on the Sygnia platform, would also enjoy a rebate on the asset management fee of 0.1%.

The MSCI World db X-tracker ETF currently has a total expense ratio - measuring trading costs and asset management fees - of 0.68%, while the other four are at 0.86%. The asset management fees, and hence the total expense ratios, drop as the investment amount rises.

Rick Martin, Satrix's executive director, expects the new ETFs will have a total expense ratio of 0.25% to 0.4%, and will compete with Sygnia's db X-trackers on these costs, but investors need to weigh up all the costs of investing, including the costs of accessing the investments.

Nerina Visser, a director at ETF platform provider etfSA, said Satrix's costs were low because instead of investing in each share in an index, Satrix was investing in a single foreign currency ETF tracking the index.

The underlying ETFs are offered by one of the largest ETF providers in the world, iShares, part of the world's largest asset management group, BlackRock.

A 41-year history of index funds

Visser said the Satrix ETFs were like feeder unit trust funds that offered a rand-denominated investment into a fund that in turn invested in a single foreign-currency denominated offshore fund.

One of the two CoreShares ETFs that track foreign market indices, the CoreShares S&P 500, is also invested in a foreign currency-denominated ETF provided by the second-largest ETF provider in the world, Vanguard, founded by John Bogle who created the first index fund in 1976.

The CoreShares S&P500 and the CoreShares Global Property ETF listed in Mauritius in May last year and on the JSE in November.

Gareth Stobie, MD at CoreShares, said that on listing, the company indicated that the asset management fee for the equity ETF would be 0.45% and for the property one 0.55%.

The total expense ratios would probably be 0.55% and 0.65% respectively.

However, CoreShares subsidised the fees over the first year, resulting in total expense ratios of 0.2% and 0.27% to the end of June this year for the S&P500 and the property funds respectively.

However, he said this total expense ratio was expected to increase in line with initial projections now that the S&P500 index had R409-million invested in it and the global property ETF had R260-million.

Stobie said CoreShares would launch a foreign equity market index-tracking unit trust later this year.

And with an eye on its competitors' costs and increasing investments, costs could reduce further.

In addition to the ETFs that offer exposure to offshore markets, two unit trust funds track global indices. Old Mutual offers a FTSE RAFI All World Index Feeder Fund and Satrix has an MSCI World Equity Index Feeder Fund.

Satrix has managed five other foreign currency offshore index-tracking unit trusts, with assets under management of more than R15-billion, for over 10 years.


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