Be your own fund manager: Using low cost ETFs to deliver foreign currency returns. A primer. 

A broker is pictured near a computer screen showing movements in the stock market since the morning opening at the Colombo Stock ExchangeBy Jackie Cameron

It has never been easier to take charge of your own investments. You can build your own portfolio of shares, bonds, property and other assets using lower cost vehicles called Exchange Traded Funds (ETFs).

ETFs are similar to unit trusts in that you are investing in a basket of assets, which means your risk is diversified. However, they cost a fraction of the amount you are charged by specialist South African fund managers to select underlying investments on your behalf.

As they aim to deliver the average performance of whichever group of assets they are tracking, you are unlikely to be disappointed with your returns – provided you invest for the long run.

Many studies have shown that professional fund managers are mostly unable to consistently beat index returns. If you opt for index trackers, like ETFs, at the very least your returns are likely to be just as good as the average fund manager. However, don’t buy and sell too frequently, as trading costs erode returns.

Another advantage of investing in international ETFs – as opposed to South African ETFs – is the currency hedge element. As the rand weakens, you will see your US and other investments improving. The flip side is that your international investments will look less attractive as the rand strengthens.

ETFs: how to buy, what’s available

ETFs trade on stock markets like shares. You buy and sell them through stockbrokers or through online trading platforms (Standard Bank Webtrader has a free demonstration version for you to try).

Your bank can help you with South African Reserve Bank approval for the first R1m you invest. You need South African Revenue Service clearance for an additional R4m. Ideally you need at least US$10 000 per trade in order to keep the costs low in relation to the amount you are putting into shares (for more, read Buying international shares from your laptop in SA).

After you have deposited money into a trading account, you are ready to go. After deciding which ETFs you want, how much of them and whether the price is acceptable, you click the “buy” button and the trade is executed.

The hard part is identifying which ETFs you want to hold. There are ETFs available on stock markets around the world.

US-listed ETFs are particularly popular, with many offering access to assets listed elsewhere in the world. As Simon Brown of Standard Bank said on a recent roadshow to introduce South Africans to international share trading and Standard Bank Webtrader: in the US alone, there are more than 1 300 ETFs covering every possible asset class, index, sector and equity style.

You can buy US-based ETFs that track Europe or other markets, from India to South Africa. Some ETFs track indices of shares that cut across markets.  There is no clear advantage to buying ETFs that are listed on markets other than in the US, though there is nothing stopping you opting for those if you want them, is Brown’s message.

The South African range of ETFs, which have a combined market capitalisation of roughly R60bn, pales in comparison to the US’s ETF market capitalisation of about US$1.6 trillion, said the investment expert. “That’s just the US. This is just a slice of it. It shows you the scope and breadth of that particular market,” said Brown of the range of US ETFs.

When choosing an ETF, pay close attention to the expense ratio and aim for less than 0.5%, said Brown. You are also looking for high liquidity – so that your securities are easy to sell when you need to  – and should generally not opt or an ETF that is smaller than US$100m (or R1bn), is Brown’s advice.

Hunting for ETFs

So where do you start looking for ETFs to add to your portfolio? One of my favourite ETF tools is ETF Database. You type in your asset type or sector and the search engine will throw up a list of ETFs that match your criteria.

Another starting point is Blackrock’s iShares website. Brown tells investors that this is a great resource in which to dig around. This company has one of the largest selections of ETFs in the world. It says not far off 40% of the world’s assets held in ETFs are in its products.

Warren Buffett, one of the world’s greatest investors, favours Vanguard’s S&P 500 tracker. He has said it is low cost and hopes his wife’s money will be invested in this ETF after he has passed away. Vanguard has a wide range of ETFs to consider.

Here on BizNews we continually highlight interesting ETF investment possibilities. For example, earlier this month we covered ETFs that specialise in tracking shares with good dividend yields and ETFs that invest in India.

You can opt for ETFs that blend asset classes in a similar way that a retirement fund does: by structuring them to suit specific investment time horizons and objectives. We also discussed how to combine ETFs to produce a balanced portfolio.

For more on these, and other investment ideas, see the BizNews Global Investing section.

Also read:

Be your own – great – investment manager in one easy step: multi-asset ETFs

International share investing: South Africans get stuck into global ETFs

Low-risk, high returns from re-emerging markets – in one easy investment

Value investing on the S&P500? It can be done

Q&A: What’s easiest way to buy Nigerian shares?

Q&A: How do I get to own S&P 500 tracker shares, collect the dividends?


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