Glossary
Opinions
Articles
Beginners Course
Lecture Modules - PDS
Exams
New Highs
Winning Shares
Lecture Modules - Resellers
About - Background Approach
Privacy Policy
Daily Quiz
Software Download Steps
Logout
Dashboard
Log out
By now you should be aware that there are different avenues you can take when investing on the JSE. Essentially buying shares is the simplest of these, as this requires you to only have knowledge of the company in which you would like to invest. Whether you invest in a company or not depends on whether you believe this company will be profitable in the future. A diversified portfolio of shares ensures your risk is minimised and you have a wide exposure to the market, as opposed to having all your eggs in one basket. But there is a cost to diversification – and that is a mediocre performance. The more different shares you own the more average your overall performance will become. Although buying good quality blue chip shares in a bull market, with a strict stop loss, is a sound investment strategy, there are other ways to diversify your portfolio, while keeping your risk minimal. As was explained in module 4, there are many types of investments. In this module, we will discuss exchange traded funds (EFTs).
Buying a share entails becoming a part owner in a company. The value of your share is determined by the perception of the company and its future profitability. On any stock exchange, groups of shares and other securities are gathered together to form what is called an index. An ETF is simply a listed investment product which tracks and follows a specific index of shares, bonds, commodities or any other security. It is traded exactly like a share and has the same dealing costs. ETFs also provide the investor with the ability to invest in a wide range of sectors on the exchange, resulting in minimal risk and steady returns, provided, of course, that the index being tracked is performing well. The problem with investing in ETFs is that you need to track all the shares/investments in the ETF to properly analyse them. According to a report in the Business Day on the 9th of September 2021, there are 84 ETF's listed on the JSE, with a market capitalisation of more than R140 billion.
An example of an ETF is the Satrix 40. The Satrix 40 is one of the oldest ETF products on the JSE. It tracks the JSE’s Top 40 Index, enabling the investor to focus on a single security that provides a diversified group of the Top 40 companies on the JSE. As well as providing price performance of this index, it also pays out quarterly dividends net of costs received from the JSE Top 40 companies. Let’s take a look at this ETF’s chart:
Satrix40 ETF (STX40) May 2019 to February 2021 - Chart by ShareFriend Pro.
As you can see, this chart shows the 21 months from May 2019 to February 2021. In that time, it traded sideways and then spiked down in March/April of 2020 with the pandemic. Since then, it has recovered to resume its strong upward trend. If we compare this to the JSE Top 40 index below, you will see that it is nearly identical to the Satrix 40 ETF above.
JSE-ALS40 Index (J200) May 2019 to February 2021 - Chart by ShareFriend Pro.
It is quite evident from this chart that the ETF follows this index very closely. The Satrix 40 ETF is a market capitalisation index ETF, which means that the companies in the index with the bigger market caps. take up more space within the ETF. So, Naspers will take up more of the EFT than Sasol, because it has a much larger market cap. What this comes down to is that when Naspers does really well, so does the ETF. When Naspers loses value, so does the ETF. And big moves in the smaller companies on the index have little influence on the value of the ETF.
ETFs are great for beginners in the market, as they allow you to gain exposure to a wide variety of sectors, while minimising your risk. Let us recap what we have learnt so far by listing some of the main characteristics of an ETF:
ETFs have become very popular over the last decade, with more and more people opting for this easy and affordable way of investing on the stock exchange. They provide convenience as they allow the investor to spread their capital over many securities from gold bullion to major indices, rand hedges and industrial shares.
ETFs can be grouped into categories, namely, equities, bonds, commodities and listed property. Their dealing costs are quite a lot lower than other investments and they are very liquid. Throughout the world there are over 4000 ETFs. For a list of South African ETFs, the www.etfsa.co.za website is worth looking at.
A unit trust is a collective investment scheme in terms of the Collective Investment Schemes Control Act (45 of 2002). Its funds invest in a range of assets such as shares, property and bonds. It is managed by a fund manager, who decides what assets are purchased. The investor buys “units” in the trust and the price of these units is determined by the performance of the assets and how many units are in issue.
A unit trust is open-ended – it does not have a start and finish period. The price of the units within a unit trust multiplied by the number of units (minus all costs) represents the underlying value of the assets within the trust. The units always represent the value of the assets invested in, and are not affected by demand and supply. When new units are bought, units are created to match the buying price; when units are sold, they are sold at the selling price of the unit trust, which directly reflects the value of the assets held. So units are therefore created when money is invested and dissolved when money is taken out of the fund.
This is very different to an ETF, which is an actual listed security which trades on the JSE exactly as a share does. It is not defined as a collective investment scheme and there is no fund manager. They follow the same shares as are in the index - in the same proportions. Therefore the costs are a lot lower.
One of the most interesting aspects of ETFs is to compare them with individual shares and the JSE sector indexes which they are designed to follow by using the comparative relative strength (CRSI). So for example, if you take a CRSI of the Satrix40 against the JSE ALSI40 you will get the following 5-year chart:
Comparative RSI –February 2011 to February 2021. Chart by ShareFriend Pro.
What this shows is that while the ALSI 40 and the Satrix 40 perform very nearly the same way, there are slight differences over the short term. These differences are due to the time delays between when shares are bought and sold in order to keep the ETF the same as the index. The index reacts immediately to the changes in price and changes in which companies it tracks, whereas the ETF is subject to a slight delay when changing its holdings, as trades take time to process. Because of this, they can never be exactly the same, but dividing the one by the other gives a chart which is effectively horizontal.
If needed, go back to lecture module 26 on relative strength to refresh your knowledge of this indicator and how it is calculated.
You should also be aware that there is a difference between an ETF and an exchange traded note (ETN). Although both are traded on an exchange in the exact same way as a share, ETNs do not track an index directly, but through a bond issued usually by a bank. This means that their price does not vary as much from the underlying instrument as an ETF. They are unsecured – which means that if the bank (like Standard Bank) which issued them was to go insolvent, investors would lose their money.
With EFTs the FSB and JSE require the manager to physically hold the assets being tracked. With an ETN, this is not the case, however the issuer is obligated to deliver the exact performance of the index being tracked. It is therefore vital for the investor to assess the issuer's credit-worthiness and also their financial statements before investing in these instruments.
In general we advise private investors to stick to ETFs.
All the ETFs are available on the ETFSA website (http://www.etfsa.co.za/ETFs.htm) – including the Satrix ETFs.
Watch this JSE video to get a further understanding and overview of indices and ETFs: