There’s nothing passive about ETFs: 20 years of phenomenal growth in SA

The idea that exchange traded funds (ETFs) are passive investments needs to be revised and reframed, according to Nerina Visser, ETF strategist and adviser at etfSA.

Celebrating the 20th anniversary of ETF trading in SA, Visser says that with 78 ETFs and 124 ETPs (exchange traded products) available to investors via the JSE, decision-making needs to be decidedly active.

In the online BDFM Investment LIVE Dialogue presented in partnership with the JSE, the evolution of ETFs over the past two decades were discussed, with what can be expected in the future.

Visser was joined by Helena Conradie (CEO of Satrix) and Adèle Hattingh (business development and exchange traded products manager at the JSE) in a conversation moderated by economic journalist Fifi Peters.

ETFs have come a long way since the Satrix Top 40 ETF was launched in SA on November 27 2000. The ETF industry at that stage showcased a market capitalisation of just under R3bn. From this humble beginning, there are now 78 ETFs listed on the JSE with a cumulative market capitalisation of about R100bn — a compound annual growth rate (CAGR) of 20% and on par with international ETF growth trends. ETF value traded on the JSE averages R600m daily.

Adèle Hattingh says the phenomenal growth in ETF offerings stems from the shift of initially “vanilla” equity ETFs that focused primarily on industrials and financials, to nonequity asset classes that included gold — a commodity that previously could only be accessed via Kruger rand.

It’s the inclusion of commodities such as gold in ETPs that Helena Conradie says differentiates SA from ETF offerings of other countries.

But not only have the asset classes shifted, the methodology and criteria for how ETFs are constructed have evolved with “Smart Beta” penetrating the market. Before their entrance, index construction was based solely on market capitalisation.  

Altogether, these factors have contributed to the buffet of ETPs now available to investors, where they’re able to access exciting new sectors and foreign exposures.  

The Covid-19 pandemic is also likely to affect ETF offerings. Conradie says the pandemic has been a catalyst for greater focus on environmental, social and governance, and megatrends that target the fourth industrial revolution (4IR) and disruption technologies, robotics, cybersecurity — and even working-from-home ETFs — are bound to come to the fore.

Visser says it’s as a result of this wide choice that investors will need to be more active in deciding where they choose to place their hard-earned cash.

But the growth in ETFs since 2000 has also come about because of the low barrier for entry. Conradie said that it’s possible to start investing in ETFs for as little as R300 a month, with many platforms now having no minimums. This has been key in democratising investment, she says. The average person can now participate in the stock market and gain exposure to China and 4IR from R50 a month.

If ETFs are performing so well, why are financial advisers not as active in getting their clients on board? Consensus was that there’s possibly too little incentive for financial advisers to sell ETF products since they’re such low-cost vehicles, offering no commissions. There’s also the issue of people investing in what they’ve known and been practising for years.

The experts agree the way about this lies in providing more education on the benefits of ETFs, to eventually drive behavioural change. Conradie says people are hungry to invest, and hungry for information.  

By simplifying and demystifying ETF investments, there’s bound to be a change in attitude, creating opportunities for the everyman — and institutional investors — to realise greater financial abundance and security.

Watch the full discussion below:

This article was paid for by the JSE.