Blue Chip Issue 90

BLUE
CHIP
INVESTMENT | Exchange-traded products
ETFs, ETNs and
AMCs: is this the
future of investing?
Recent developments in the market for exchange-traded products
are providing access to a whole new world of investment opportunities
for financial advisors and their clients.
As these product innovations happen, further innovations
at an advice level will become possible. Effectively
navigating this new order is going to be challenging
for financial advisors.
ETPs: the new order
The Johannesburg Securities Exchange (JSE) has recently allowed
the listing of a range of new exchange-traded products (ETPs).
Individuals can now buy and sell portfolios through a single listed
investment product across multiple asset classes.
This innovation has had two key effects: firstly, investors can
now access via the JSE what used to be only available via mutual
funds accessed through Linked Investment Services Providers
(LISPs). Secondly, the range of investment opportunities available
has also expanded rapidly. You can now get access to previously
unavailable investments such as individual global stocks (eg
Amazon or Alphabet), new indices (such as the Helios Space
Index) and even actively managed diversified commodity funds
(such as the one offered by Coherent Commodities in partnership
with UBS). These choices were not available via the mutual fund
channel, nor is it likely that they would be.
This range of additional choices brings opportunities to lower
costs and increase solution customisation – but also brings
complexity from an advice perspective. For active investors, ETPs
offer the advantage of intra-day pricing and trading vs the daily
price and trade settlement opportunity offered by mutual funds.
Exchange-traded Funds
These securities track the performance of a specified index such as
a portfolio of shares, bonds or single commodities. According to
the JSE, at the end of September, there were 98 exchange-traded
funds (ETFs) worth about R136-billion. Some of the most popular
examples include the NewGold and Top 40 ETFs.
The defining characteristic of an ETF is that the index (and thus
the constituents) is defined in terms of a pre-defined set of rules
reflecting a set of desired characteristics. As these rules are defined
in advance and implemented mechanically, they are well-suited
to investors who want the specific characteristics embodied in the
index design at a cheap total cost.
For example, currently, the largest equity ETF by value tracks
the JSE Top 40 index, which gives an investor access to the returns
of a portfolio of the 40 largest listed companies on the JSE. It is
important to note that these products are not limited to marketcapitalisation-based
indices. You can get access to “active” or
“smart” indices. As these ETFs track the performance of underlying
assets or indices, they follow a passive investment strategy, usually
at a very low cost to investors.
Exchange-traded Notes
Exchange-traded Notes (ETNs) are fundamentally similar to ETFs
but differ in one key dimension: they are notes (or debt obligations)
issued by a regulated party, usually a bank. This means that there is
credit risk – if the bank goes under, the investors must get in line
with other creditors. It also means that they are fixed term – they
expire after a period.
ETNs provide the holder with the returns to the underlying
index which is specified in the ETN itself. This structure gives it
great flexibility – the underlying index can be created from a
combination of literally anything that is listed (and thus can be
objectively valued).
As of the end of September 2023, there were 74 ETNs listed on
the JSE, with the majority providing access to specialised global
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