October 24 2009 at 11:51am

It is about to get a lot easier to invest in exchange traded funds (ETFs), most of which are low-cost collective investment schemes that are listed on the JSE and that track pre-selected security exchange indices.

Next week an information and administration platform will be launched called etfSA The Home of Exchange Traded Funds (etfSA). The platform will allow you to access all the locally available ETFs from one source without paying one cent in additional costs. Its website is www.etfsa.co.za.

The platform has been created by Mike Brown, formerly the chief executive of the country’s first ETF provider, Satrix.

Although ETFs have rapidly gained popularity since their launch in 2000, sales have been restrained because many investment products are distributed via the administration platforms provided by what are called linked investment service provider (Lisp) companies.

The Lisps in turn provide legal umbrella products, such as retirement annuities (RAs) and investment-linked living annuities (Illas), which enable investors to select from a wide array of different underlying products, mainly unit trust funds provided by numerous asset managers and unit trust management companies.

The main reason ETFs are not available on most Lisp platforms is that most Lisp computer systems are not designed to handle ETFs, which are priced differently.

ETFs are traded only as single units (shares), while unit trusts are traded in fractions of one unit, which creates timing and process problems.

Vladimir Nedeljkovic, the head of ETFs and index products at Absa Capital, says that currently only two Lisp platforms distribute the Absa ETF range, namely Absa Investment Management Services (Aims) and AOS.

He says Absa is negotiating with several Lisp platforms to include the Absa ETFs.

Brett Landman, joint managing director of Satrix, says Satrix ETFs are available on the Momentum investment platform.

We are endeavouring to be included on as many platforms as possible but it is not a simple matter to get the Lisps to agree to include the products, both from a decision-making perspective and an administration perspective, he says.

The move by etfSA should place downward pressure on current Lisp costs, which can be as high as two percent of your investments a year.

Further pressure on Lisps will occur when etfSA launches its own RA and Illa products.

Brown says he is planning to first launch an RA product that will use ETFs as the underlying investments.

Greater range

Currently there are 24 ETFs listed on the JSE, most of which are linked to equity indices.

Brown says the range of ETFs is expanding and will soon include a greater range of fixed-income ETFs, including money market ETFs, which will make it easier for retirement products to be launched on the etfSA platform

Unlike most Lisps, where you are required to go through a financial adviser, you will have the choice on the etfSA platform either to invest directly or to use an adviser with whom you will have to negotiate an advice fee.

Brown says there is no additional cost for using the etfSA platform, because his company will be paid rebates by the ETF providers.

The advantage for ETF investors is that it will be easier to manage their ETF investments and they will receive consolidated statements.

You will be able to transfer your existing ETF holdings onto the platform at a nominal cost of about R250 a transfer. There will be no capital gains tax consequences.

Brown says etfSA will also host the new generation of exchange traded products that become available in South Africa.

For example, exchange traded notes (ETNs), which already trade on some foreign exchanges, are listed index-linked structured pro-ducts. These products provide capital guarantees while providing returns based on the growth of an index — or part of the growth or a multiple of the growth. However, you miss out on dividend returns.

The structured products have been available in South Africa since the 1990s but had a controversial start because of lack of proper disclosure of information, high costs and fixed investment periods.

Brown says that by trading the products on an exchange there is likely to be far better disclosure, costs will be reduced and you will be able to trade your investment at any time.

The current index-linked products have investment terms ranging from one to five years, while ETNs have durations of up to 30 years.

Brown says the www.etfsa.co.za website will go live next week. You will be able to download the application forms and get information on ETFs, but the online transaction platform will be activated in early November.

The minimum investments on the ETF platform are R1 000 for a lump sum and R300 a month for debit orders.

Definitions

Exchange traded fund

An exchange traded fund (etf) is a listed security on a stock exchange that invests in other shares or in commodities. If the underlying investments are in other stock exchange-listed securities, either here or internationally, they can also be registered as collective investment schemes, providing investors with greater security and tax advantages.

All 24 ETFs listed in South Africa are collective investment schemes, bar one, Absa Capital’s NewGold ETF, which invests in actual gold bullion.

The first ETF (the SPDR 500) was launched on January 29, 1993 in the United States. South Africa’s first ETF (the Satrix 40) was launched in 2000.

The range internationally has now been dramatically extended, providing funds that track commodity prices, to those that seek to give enhanced performance (the eRafi), to those that seek to provide different outcomes, such as the Satrix Divi, which tracks the fortunes of companies expected to provide the best dividend flows.

There are also ETFs that allow you to track foreign markets (the dbx ETF range, provided by Deutsche Bank), property (Proptrax, provided by property company Resilient) and bonds (Investec’s ZGovi).

The big attractions of ETFs are: