What is an ETF?
AN ETF BREAKDOWN
ETF stands for "exchange traded fund" which tells us a bit of what it is - so yes it is a fund and yes it is traded on an exchange exactly like a share is. The difference between an ETF and a normal share though is that a share typically just gives you exposure to one company - ie. if you buy shares in MTN you are exposed only to MTN. However, ETFs are made up of a basket of assets (most often shares) - so when you buy an ETF, it is almost the same as you buying all of the shares that are in the basket.
ETFs are generally constructed so that they replicate the performance of a specific index. For example the Satrix 40 ETF replicates the performance of the JSE Top 40 Index - the aggregate performance of the 40 largest companies listed on the JSE. Larger companies carry more weight than smaller companies in the index, so when they move up or down, they generally have a bigger impact on the fund price.
What is an index?
So lets say we have 3 companies - XL Ltd, ABC Ltd and DEF Ltd and we want to
construct an index that replicates the share price movements of these 3 companies. To make it easy, lets say that XL is worth R50m and the other 2 are worth R25m each. In total they are worth R100m. On this day we can say the index which tracks their movement has a value of 100.
The next day, the values of these companies change as their share prices change. Let's say that after the market closes, XL is now worth R45m, ABC is worth R27m and DEF is worth R30m. In total they are now worth R102m. This means the index now has a value of 102. XL was initially 50% of the index (R50m/R100m) but as it lost value, it became only 44% (R45m/R102m). Companies weightings in the index will fluctuate over time as they become bigger or smaller relative to the others in the index.
What do I own when investing in an ETF?
You will own shares or units in the fund itself. The fund then owns shares in the underlying companies which are part of the index. So if you are invested in the Satrix 40 ETF through Franc, you own units in the fund. The Satrix 40 ETF will own shares in Naspers, Standard Bank, MTN etc and its share price will move up or down as the share prices of the shares it owns move up or down. Indices are rebalanced quarterly which is when the weightings are updated. This also means that sometimes companies fall off the index and are replaced by companies that have become larger than them over the quarter. As the companies pay dividends, the fund collects these and pays out to unit holders over the course of the year. Franc reinvests these dividends for its investors.
Why are ETFs good?
Diversification - investing through an ETF can give you
access to a diversified portfolio of assets even though you are buying just
once. Have a look at this article to learn about the benefits of having
diversified investments. You also don't need to try pick what individual shares
to buy - this can be time consuming and risky if you don't know what you are
doing! Low cost - ETFs are generally low cost because they are
passively managed. This means that the shares held by the fund just have to
follow the composition of the index and there aren't people who are employed to actually pick what shares the fund should hold (this is called active
management and these products are generally more expensive as these fund
managers are not cheap to employ!). Transparency - given you will know what index the fund is
tracking, you will always know what shares the fund is holding. Any cons?
Trading costs and spread - depending on who you buy your ETFs through, there can be trading costs incurred on your trade. If you are buying and holding for the long term these are less important as you only incur when you are buying or selling (they are once off costs). You should also be aware that when you are buying or selling, the price you will trade at will have to match with someone on the opposite end - ie. if you are buying, someone must be selling. Smaller ETFs can have large gaps between what a buyer wants to buy at and what the seller wants to sell at (bid/offer spread). This can sometimes be a hidden "cost" as you could end up paying a higher price or selling at a lower price but can be avoided if you stick to the larger more liquid ETFs like the Satrix 40.
What is it tracking? - not all ETFs are good, a major part of the appeal is what index the fund is tracking and how well it actually tracks the index. ETFs can also be high risk, for example if you invest in a gold ETF, it will go up or down with the gold price which can be very volatile! Sebastian PatelSebastian is an investment actuary with more then 15 years of financial services experience. Outside of Franc he likes sports, traveling and trying out new wines (as long as they're Shiraz!)Missed the last blog? Catch up nowHow to Save for Your Next Trip to Bali (or Anywhere Really)Travelling has always been in Thobi Rose's blood. However, becoming an adult she realised that when traveling you need to plan for the financial impact.7 Debt Traps and How to Avoid ThemLike all traps, debt traps are tricky to get out of so it is best to avoid them altogether. That's why this article is about common debt traps and how to avoid them.
So, Those Markets Hey...Q1 '21Last quarter the markets continued their historic rise. This article is a simple breakdown of the Top 40 JSE listed companies Q1 for 2021.Click here to start investing
Investing and why it Matters
Investing is for rich people ,that is what I thought when I was at school. Although, if I’m honest with myself I was actually facing two barriers but only acknowledged one to myself - that I couldn’t afford to invest because I didn’t have any money. The second barrier, that I wasn’t willing to admit, is that I didn’t know how to invest.
I finally got round to understanding how to invest in my mid-30s (better late than never) and built and launched MoneysaverSA to help other people overcome the same challenge that I faced by making investing easy. No minimums. No complicated choices. And everything managed through an easy-to-use moneysaverSA WEB.
That said, the first challenge remains perhaps the most important barrier, because if you think you don’t have any money to invest, you won’t even begin to ask yourself the second question of how to invest.
That’s why in this post I want to discuss the importance of investing and why it’s so important to start when you’re young. I want to encourage you to start investing, even if it’s only a small amount of money.
Investing small amounts of money regularly is often called “micro-investing” but I don’t like that term, because money is money and using your hard earned money to invest is distinctly different from spending that money, it doesn’t matter if it’s R10, R100 or R10,000.
So why is investing so important, even if you’re only investing R50 per month?Well, it’s important for three simple reasons:1. Unlock compound growth
The first reason is also the most obvious one - by investing you start putting your money to work, by enabling real growth of your money. People often confuse saving and investing. In my mind they are very different. Saving means you’re not spending but sadly most people save in a bank account that typically offers 0-1% interest. This means that most people are in fact losing the value of their money when they save because of South Africa’s 3% inflation. Investing means your money has real growth opportunity and therefore unlocking the potential of compound growth. However, in order to maximise your growth potential it’s important to start investing as early as possible (to understand why it’s so important to start as soon as possible .2. Make a habit of investing
The second reason is more subtle and has to do with setting up the habit of investing. More importantly, making a habit of paying yourself first. The best way to do this is to set up a regular stop order such that when you first get paid your salary, one of the first things you do is contribute to your investment account. Once you have established a habit, you’ll be surprised how easy it is to manage your ongoing monthly expenses. And the best part, you don’t need to wait until the end of the month to see if you have money left over to invest, instead any extra cash you have at the end of the month you can use to top-up your investment.3. It’ll change the way you think about money
The last reason is arguably the most important because once you see the power of investing and experience first-hand how your money can work for you, instead of you working for money, it will change the way you think about and manage your money. I had this change of mindset when I started investing and it radically changed my life - I started investing more which allowed me to expand my future plans and dreams. It’s a positive feedback loop that will change your life.
So to conclude, no matter where you are in your life, you can and should start investing today (or invest more, if you’re investing already). And hopefully you’ll agree with me that it doesn’t matter how much you invest, the important thing is TO invest.
My cell 0811227317