• Stock check

    2024 was a landmark year for exchange traded funds and their actively traded counterparts, with a host of new players entering the local market

    Stock check

    Think of an exchange-traded fund (ETF) as a playlist on a music streaming service. For one fee you get access to a library of music (read: a portfolio of assets). You don’t pick and purchase each item separately, but instead you get a curated collection. You decide on the overall direction – for example, do you want pop or rock music for your playlist, one artist or many, high energy or lounge style, and so on.

    Similarly, your ETF reflects personal preference of assets (stocks, bonds or commodities such as platinum), themes and sectors (such as tech, healthcare, clean energy), geographical focus (such as the US, emerging market, Africa-focused), and much more. Traditionally, ETFs passively track an index, such as the JSE Top 40 or the S&P 500, and the underlying portfolio mirrors the performance of these firms.

    ‘ETFs are listed investment products that trade just like a normal share – and it’s really a single investment product with many investments rolled into it,’ says Adèle Hattingh, business development and ETP manager at the Johannesburg Stock Exchange (JSE). It’s this versatility, coupled with cost-effectiveness, that makes them especially attractive to individual and entry-level investors.

    ‘ETFs enable the investor to invest smaller investment amounts according to their means,’ she adds. ‘This ultimately helps to manage the investment risk for the investor and brings diversification to the investor’s portfolio. It unburdens the investor of the “stock picking” process and makes them less reliant on the performance of one company – which is particularly attractive to someone who might not have large sums of money to invest and so decides on a rolled-into-one investment product.’

    Clearly, it’s a recipe that works. Bloomberg described 2024 as a landmark year for ETFs, noting the ‘biggest annual inflows on record’. In mid-November 2024, it reported an ‘insatiable appetite’ that had helped push total net inflows into US ETFs past US$913 billion.

    While the South African ETF market is much smaller than the US and European markets, the local five-year compound annual growth rate is close to the global growth rate, according to Hattingh. ‘To date the JSE has 116 ETFs listed on the exchange, with a market cap exceeding ZAR180 billion. We’ve also welcomed two new issuers to the market this year.’

    Perhaps not surprisingly, ETFs are one of the most popular investment vehicles in South Africa. Nearly half (43%) of the net asset value of retail clients of online investment platform Easy Equities is invested in ETFs. ‘ETFs are redefining the way investors gain investment access in Africa by combining simplicity, transparency and cost-efficiency, making them an ideal tool for both novice and seasoned investors,’ says David Oberholzer, business manager of EasyETFs, a division of Easy Equities. ‘What excites us most is their potential to democratise access to financial markets and investment opportunities for all investors. This holds true for most asset classes, and investment strategies – whether local, regional or global – allowing investors to participate in financial markets.’

    In South Africa, the ETF market is largely driven by investors seeking exposure to foreign-referenced assets through inward-listed ETFs, says Oberholzer. These funds allow investors to access global equity markets, benefiting from diversification and currency hedging opportunities. He adds that commodity-based exchange-traded products, such as those tracking gold and other precious metals, remain highly popular. The combination of international exposure and commodity resilience ensures that these types of ETFs continue to dominate investor demand in the South African market.

    ‘In addition to bidding to be a record year for ETF inflows, 2024 will surely be remembered for the rise of active ETFs,’ according to global financial services firm Morningstar. ‘These invest in a portfolio of stocks or bonds chosen by a manager and differ from traditional ETFs that passively replicate an index.’

    Actively managed ETFS have surged on the JSE – from six listings at the end of December 2023 to 25 listings by the beginning of December 2024

    Hattingh explains that in simple terms, an actively managed ETF (AMETF) is a listed unit trust. ‘The portfolio manager of the AMETF decides and selects assets, based on a strategy and mandate that aims to outperform the market – this is known as an active investment strategy,’ she says. ‘An AMETF differs from a traditional “passively” managed ETF in that it does not track an index’s performance.’

    Nerina Visser, director at etfSA – one of the first companies in South Africa dedicated to ETFs – describes 2023 as the birth year of AMETFs in South Africa and 2024 as the year of significant growth. ‘This is just the start,’ she says, highlighting the surge of AMETFs on the JSE – from six listings, with ZAR1.7 billion assets under management (AUM) at the end of December 2023, to 25 listings, ZAR8 billion AUM, by the end of November 2024.

    ‘A noticeable trend in 2024 has been the range of new players that have entered the ETF industry in South Africa – both management companies (issuers, providers) as well as asset managers,’ she says. ‘Another important trend has been the proliferation of different investment strategies available via ETFs and AMETFs, especially in asset classes previously deemed hard to index or track. This is particularly noticeable in the interest-bearing/bond/income space where there has been a sharp increase in range and diversification.’

    The primary benefits lie in ‘what it says on the box’, says Visser. ‘It’s an exchange-traded fund rather than the dominant – outdated – notion of it being “passive” investments. The “exchange-traded” aspect brings investment opportunities beyond local equities to public markets (stock exchanges), allowing safe and efficient access to a much broader range of investment opportunities than previously available,’ she says.

    ‘The “fund” part of the name emphasises the well-understood notion of the benefits of pooling investments in a regulated and diversified investment vehicle – a unit trust or mutual fund. These aspects – access to different investment opportunities, well-regulated, diversified, efficiency and so on – all bode well for fast-tracking the development of African capital and investment markets.’

    When it comes to selecting an index-tracking ETF, the focus should be primarily on the index (what are the selection criteria for the stocks in that index? On which basis are they chosen?). However, Visser says choosing AMETFs requires more of the ‘traditional’ selection criteria of choosing an investment product. ‘Either way, I choose an ETF on the basis of the investment strategy and objective, the exposure profile [to asset classes, geographies, sectors, investment styles, size, and so on] and how that matches to my investment goals and mandate,’ she says. ‘Past performance ranks very low on my selection criteria, other than perhaps identifying a more attractive entry point.’

    What makes ETFs particularly valuable for Africa is their role in advancing financial literacy and driving inclusion through bridging the gap between everyday investors and sophisticated strategies.

    ‘ETFs are at the core of democratising equity investing, by providing affordable, transparent and easily accessible entry points into both local and global markets,’ says Oberholzer. ‘They allow investors to access diverse asset classes and strategies that were traditionally reserved for institutional investors, all without high minimum investment requirements or hidden fees.’

    The versatility of ETFs could revolutionise investing – similar to how streaming playlists have changed how people listen to music, no longer forced to buy records or CDs, but enjoying a curated collection that is personalised, varied and cost-effective to access.

    By Silke Colquhoun
    Images: Gallo/Getty Images, iStock