Stephen Cranston

ETFS are good saving alternatives

As government asks for low-cost savings options, exchange traded fund (ETF)-based options are becoming a realistic alternative. ETFs are cheaper and simpler to construct than unit trust-based options.

The main platform for retail investment into ETFs, iTransact, offers a retirement annuity (RA) based entirely on ETFs. ETFsa, the website run by Mike Brown, has also launched an ETF RA. Brown, who was the founding MD of Satrix, is the godfather of ETFs. Investors will be able to access a blend of ETFs intended to give a return of CPI plus 3%, 5% or 7%.

Both ETFsa and iTransact plan to offer living annuities (for post-retirement investment) once companies other than life offices are permitted to offer them.ETFs are an efficient way to access asset classes. There are now 43 ETFs and 20 exchange traded notes, which track indices. They are best known for the equity indices, notably the Satrix 40, which now has direct competition from RMB, Investec and most recently Stanlib’s Top 40 tracker. But investors can also invest in midcap, financial, industrial or resources trackers — even an AltX tracker might soon be on the cards.

There are even two asset allocation ETFs invested in a basket of indices, which meet the regulation 28 restrictions that apply to RAs — the Mapps Growth fund, with 75% equity, and the Mapps Protect fund, with 40% in equity and 35% in inflation-linked bonds. Access to all the major foreign markets, including China and Africa, is also available.

Yet ETFs hardly feature on the established investment platforms such as Glacier and Galaxy. ETFs, which count as shares, are units listed on the JSE and, unlike unit trusts, they are not set up to pay commission to intermediaries. Investors with sums of R1m or more can invest through a stockbroker, paying 0,1% brokerage.

But this doesn’t help investors who want to build up an RA via debit order. Lance Solms, head of business development at iTransact, says that intermediaries who bring business to the platform will get a fee directly from the client and not from iTransact. He says ETFs are usually materially cheaper than unit trusts, with a total expense ratio (TER) of 0,45% on average.

But investors need to be careful: the highest TER, for the New Rand trust, is 1,58%, in line with many active unit trusts, but the TER for the Absa NewFunds eRafi (invested in the enhanced fundamental index) is 0,1%. iTransact and ETFsa, which uses the iTransact platform, recently reduced their annual fees from a maximum 0,8% to 0,7% and minimum fees from 0,45% to 0,4%. This means that a R200000 client pays R1400 and can make 12 monthly purchases a year by debit order — for less than the minimum charge for a single trade from a stockbroker. But be aware that there are a number of other charges for platform investors (see graphic).

ETFs are designed to operate with the minimum tracking error. Traders can arbitrage against ETFs that do not track their indices as promised. Brown says that all the ETFs own the scrip of the underlying investments, unlike most markets in which they can replicate these holdings with swaps.Index unit trusts also cut corners and don’t always hold each security in the index, so they are more likely to underperform in the long term.

Over the three years to June 2013, the RMB Top 40 ETF has given a 15,98% annual return compared with 15,37% for the Old Mutual Top 40 unit trust.Picking the right index manager is as important as picking the right active manager.