introduction to etfs [1]

8/7/2019 Introduction to ETFs [1]

1/17

CopyrightJSE Limited 2008

www.jse.co.za

Adle HattinghEquity Market Business Development

Introduction to Exchange Traded Funds(ETFs)

1


2/17

www.jse.co.za

What is an Exchange Traded Fund (ETF)?

An ETF can be explained using the following example:

baking a cake

2


3/17

www.jse.co.za

To bake the perfect cake

3


4/17

www.jse.co.za

Baking a cake

The correct amounts of each ingredient is added to a

mixing bowlThe ingredients are mixed until the mixture the rightconsistency

The mixture is poured into a baking pan and baked at theright temperature

The cake is cut into slices and enjoyed

In the same way

An ETF and its creation can almost be seen in the same

light

4


5/17

www.jse.co.za


5

A variety of company shares, bonds or a single commodity is put into a

mixing bowl to bake a cakethis cake is known as an ETF


6/17

www.jse.co.za

ETFs a piece of cake

The ETF is then cut into cake slices and sold to

you, the investor.These slices are known as ETF units

So instead of buying all the ingredients to bake a cake, you cannow buy a slice at a fraction of the cost

In the same way

If you decide to invest in the Top 40 company shares listed onthe JSEyou can do so by investing in an ETF and not haveto buy ALL 40 companies shares individually

6


7/17

www.jse.co.za


An ETF tracksor followsan INDEX that has the same ingredients or company

shares/bonds as the ETFAn index is like a ruler...its a way of measuring how well companies share pricesare performing

Because you cant buy an index...an ETF makes it possible to invest in thosesame company shares/bonds in a SINGLE investment product

FTSE/JSE Top 40 Index: measures how well the Top 40 company share prices areperforming

If the index rose

It means that the share prices of the companies in that index also generallyrose

Which also means that your ETFs price would also have risen

An ETF unit can be bought and sold just like an ordinary share

7


8/17

www.jse.co.za


Example of how ETFs track an index (Satrix 40 ETF vs. FTSE/JSE Top 40)

8

0

500

1 000

1 500

2 000

2 500

3 000

3 500

4 000

4 500

5 000

0

5 000

10 000

15 000

20 000

25 000

30 000

35 000

2005/01/31 2006/01/31 2007/01/31 2008/01/31 2009/01/31

J200

STX40


9/17

www.jse.co.za

Global Growth in ETFs

As at end June 2010

2,252 ETFs world wide Assets of US$1trillion (+-R8 trillion)

130 ETF providers on 42 exchanges around the world

Source: ETF Research and Implementation StrategyTeam, Barclays Global Investors, Bloomberg
http://www.ssga.com/index.html


10/17

www.jse.co.za

ETFs in South Africa

There are currently 8 ETF providers

10
http://www.satrix.co.za/


11/17

www.jse.co.za


11

First South African ETF listed on the JSE in 2000

27 ETFs currently listed on the JSE

10

6

5

2

1

11

1

Top 40 Equity ETFs

Sector Index ETFs

International Equity ETFs

Bond ETFs

Commodity ETF

Dividend ETF

Property ETF

Currency ETF


12/17

www.jse.co.za


Top 40 ETFs

Sector/Style Index ETFsCommodity ETF

Dividend ETF

Property ETF

Currency ETFInternational Equity ETFs

Bond ETFs

12


13/17

www.jse.co.za

Benefits of ETFs

Diversification

Able to invest in a wide variety of shares etc byinvesting in a SINGLE investment productreducing the risk that youre taking on

Lower Costs

Cash flow distributions (dividends)

Companies payout a portion of their profits to their investors

Transparency

Regulation

JSE and FSB

13


14/17

www.jse.co.za

Benefits of ETFs

Trading Flexibility

Can buy ETFs at any time, during trading hours(9am to 5pm) at market prices

Liquidity

Securities Transfer Tax (STT) exempt

Hassle Free

You dont need to do a lot of research about all thecompanies listed on the JSE

14


15/17

www.jse.co.za

Some things to consider

15

Fees

Once off trading fee and ongoing administrative fee (monthly)Limited share ownership rights

Capital Gains Tax

Exchange Traded Price

The ETF wont track its index perfectlyMarket Risk

ETF prices will go up and down as the share prices goup and down


16/17

www.jse.co.za

Channels to use to invest in ETFs

Through a stockbroker

Through an ETF providers Investment PlanThrough an ETF Platform etfSA and iTransact

Offers a trailing commission to financial advisors registered on theplatform

Financial advisors may charge their clients an advice fee

16


17/17

www.jse.co.za

17

introduction to etfs [1]

Documents