Posted on September 24, 2014 in ETFs

2C61 /%Exchange Traded Funds (ETFs) and Exchange Traded Notes (ETNs) sound like daunting investment concepts to individuals who are not steeped in the jargon of financial markets. But actually, behind their sophisticated titles lie a universe of funds that are very similar to unit trusts.

These investments, also referred to as Exchange Traded Products (ETPs), give you access to assets that would ordinarily be too expensive for you to buy on your own. In the case of ETFs, you will be accessing the shares – or stocks – of publicly listed companies.

You will be doing this in a diversified way, because each ETF share gives you access to a spread of other shares listed on the stock exchange.

In the case of ETNs, this is exposure to currencies. gold and other commodities.

Exchange traded funds normally track indices. An index acts as a gauge of the performance of a specific group of securities. There are many indices that track shares on the Johannesburg Stock Exchange.

Indices are based on different criteria. For example, Johannesburgs All Share represents most of the shares listed on the countrys main board. The Top 40 Index reflects the performance of the 40 biggest companies listed on the JSE.  The Small Cap index is an average of the returns of about 60 small companies listed on the JSE.

You can invest in ETFs in South Africa. Or, you can use your foreign currency investment allowance to buy ETFs listed on stock markets elsewhere in the world.

Again, that might sound daunting but it is very easy these days (for more see: Buying international shares from your laptop in SA how to get started ). Whats challenging is to choose an ETF, because there are thousands of options out there in global markets.

You can also buy an ETF which is listed on the Johannesburg Stock Exchange but offers exposure to companies listed on international stock markets – including Apple, Google and the other big technology giants.

The big difference between ETFs and unit trust trackers is how you buy them. ETFs are bought and sold through stockbrokers, or via an investment plan that does this for you. Unit trusts are bought from unit trust fund providers, which must also go through stockbrokers to buy shares on your behalf.

ETFs and unit trust trackers generally perform better than unit trusts managed by investment professionals. This is largely because costs are so much lower.

For more on ETFs, see the BizNews ETF section or, for global investing insights on ETFs, visit our Global Investing section.

Quick video tutorial: An introduction to Exchange Traded Funds