Life is a series of firsts, ranging from our childhood firsts, such as our first word or our first step, to the firsts we encounter in adulthood. It is important to be aware of the reality that such adult “firsts”, such as your first property or your first child, often come at a price that individuals are not always prepared for. Thus, it is important to do your best in ensuring that one adult “first” is done to the best of your ability, your first investment.
The most basic start to investing for your future is to start saving as early as possible, as every R5.00 will build to a larger capital to invest once you are ready to enter the world of formal investments. Additionally, it is never too early to start contributing to a retirement fund, although many employers do this on behalf of their employees with contributions being deducted from their salaries.
A downside to retirement funds is that, while you provide the money, a stranger is deciding how it should be invested.
Should you decide to take some of your investments into your own hands, it is important to be educated on the fundamentals of the stock market, as historically equities have proven to comfortably outperform most other asset class in the long term.
A relatively foolproof way to get exposure to the equity market while still learning the ropes, is by investing through exchange-traded funds (ETF), such as Satrix. Satrix was the first ETF to launch in South Africa in 2000, even though at the time it was considered to be merely another glorified unit trust.
A unit trust allows investors to contribute to a pool of funds, from which the fund manager purchases shares that they think will outperform the market, in accordance with the mandate of the particular fund. These are known as active investment funds, in that the fund manager actively invests the funds in order to achieve a superior return.
All unit trusts are benchmarked against a particular index. For example, a general equity unit trust may use the FTSE/JSE All-Share Index as its benchmark. However, despite the active management of the funds, not many fund managers manage to beat the index that the fund is benchmarked against, and very few do so consistently.
Taking this into consideration, an ETF has the purpose of tracking an underlying benchmark, usually one of the JSE indexes, this is done by investing in shares that make up the index being tracked. Because transactions tend to be fewer than with actively-managed funds – and an index tracker doesn’t have to carry all those large fund manager salaries – the costs of ETFs tend to be lower.
These funds are known as passive investment funds, since they do not aim to outperform a particular index, but rather aim to provide a return equal to that of the index being tracked. An ETF is a listed security that replicates the composition of an index or a pre-selected basket of shares, which will invest passively in the same way as a unit trust index fund does, reflecting only the shares represented in a pre-selected index.
Index funds provide investors with all the benefits of a diversified portfolio and will ensure the return of the market, whilst incurring the costs of one transaction only.
Dividends paid out by the underlying companies comprising the particular index are paid out to investors quarterly. There is also the option of having these dividends automatically reinvested in additional units.
There is a myriad of ETF platforms to invest form, as well as aggregator platforms (with the largest being EasyETF), each tracking a particular index. A would-be investor now has access to around 100 different funds, providing access to both local and international markets.
In summary, the advantages of investing in an ETF rather than individual shares are as follows:
-You have a diversified investment portfolio comprising a number of shares, depending on which index you are tracking.
-You can buy or sell at any time since ETFs are listed directly on the JSE.
-The price is easy to determine, as it is based on the underlying index, divided by 1 000. For example, if the FTSE/JSE Top 40 index is at 77 675, the price of an ETF tracking this index will be R77.68 per unit.
-The costs are low, particularly if you invest directly through the ETF’s own platform (e.g. Satrix or Sygnia, among others). However, the convenience of investing through an aggregator platform such as EasyETFs often outweighs what is a marginal additional platform fee.
WRITTEN BY STEVEN JONES
Steven Jones is a registered SARS tax practitioner, a practicing member of the South African Institute of Professional Accountants, and the editor of Personal Finance and Tax Breaks.
This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. Errors and omissions excepted (E&OE).