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Exchange Traded Products
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Exchange Traded Funds (ETFs)  

An exchange traded fund sounds complicated, but in reality it's a simple product. Its sole purpose is to track a specific market index, like the JSE All Share.

In the past, the only way to track the JSE All Share would have been to buy one share in every company making up the All Share index which would be time consuming and result in high transaction costs.

With an exchange traded fund, you benefit from combining the best features of a unit trust and an individual stock:

  • ETFs are open-ended like unit trusts, with the flexibility of being traded like ordinary shares
  • You are buying a portfolio of securities, which diversifies the risk
  • You choose the index, sector or commodity you want to track; or a range of ETFs over several markets.

Exchange traded funds are ideal building blocks in creating the investment portfolio that suits your own needs and investment goals.

Benefits

  • Trusted investment vehicle
    • Introduced in the United States in 1993, ETFs have been a trusted feature of the South African investment landscape since 2000.

      By 2009 there were over 2 000 ETFs listed on stock exchanges in 42 countries worldwide, managing more than US$862 billion on behalf of investors. In South Africa, there are now more than 40 ETFs listed on the JSE with close to R100 billion in assets under management. Absa CIB is a dominant player with 16 ETFs from our asset classes (commodities, equity, fixed income, and money market) and close to 50% of the South African market capitalisation.
  • Spreading the risk (Diversification)
    • ETFs are an effective and secure means of trading a basket of shares - index, sector or asset class - through a single transaction.

      With an ETF, you get instant exposure to a basket of securities, helping you spread your risk more widely. We believe that diversification, or spreading the risk, is the safest approach to ensure your investment portfolio performs as expected across a range of market conditions. Diversification helps in risk mitigation and can provide lower level of risk to your portfolio.
  • Lower Costs
    • ETFs have a low fee structure because they aim to mirror the performance of an index (a passive fund), hence there is no stock selection process required, and the re-balancing is infrequent. These factors reduce the management expenses of running an ETF compared to an actively managed fund.
  • Liquidity
    • ETFs are easy to buy and sell. This is referred to as being liquid. All ETFs have a Market Maker to ensure that liquidity is always maintained. If there is no willing buyer or seller at the other end of your trade, the Market Maker will always step in to be the missing counter-party.
  • Convenience and Flexibility

    • ETFs offer exposure to broad markets through a single investment transaction and respond to market movements on securities exchanges throughout the trading day.

      ETFs are also easily traded, with investors buying and selling ETFs like shares, typically through a stockbroker account. Investors can also invest in ETFs through investment plans with accredited financial service providers, and through the Absa online portal (www.absa.co.za).

      Please click on the "How to invest" tab on the top of the page to find out more details on the different ways to invest in our ETFs.

  • Transparency
    • The holdings of an ETF closely mirror the underlying index it tracks as a benchmark. These components are fully disclosed, hence you know where your money is invested.

Risks

Although Exchange Traded Funds (ETFs) are generally regarded as lower-risk investments, particularly over the medium- to long-term, they are still based on shares or securities with the inherent risks of trading on any securities exchange.

The value of ETF securities will rise and fall according to market changes. As with unit trusts and most investment vehicles, your capital is not protected in an ETF. Therefore, depending on market movements during your investment period, you are not guaranteed to get back your full investment when you decide to sell.

Particular risks include:

  • General market risks
  • Interest rate risks
  • Liquidity risks
  • Tracking error

Why are ETFs different?

Trading decisions
The ETF simply replicates the index and no additional amount of money goes in trying to outperform the market.

Running costs
Because ETFs are pasively managed they tend to have lower costs e.g. the rebalancing process is infrequent compared to actively managed funds, which means less transactional costs.

Pricing and trading
ETFs – like any other listed security – are re-priced continuously in accordance with market movements and can be traded at any time during normal JSE trading hours.

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About Corporate and Investment Banking
Copyright 2013 Corporate and Investment Banking, Absa. All Rights Reserved. Corporate and Investment Banking is a division of Absa Bank Limited, Reg No. 1986/004794/06. Authorised Financial Services Provider. Registered Credit Provider Reg No NCRCP7.