🔒 Top tips on how to grow wealth from small investments in ETFs – Dawn Ridler

In this BizNews Personal Finance podcast with Jackie Cameron, a Johannesburg investment specialist shares how Exchange Traded Funds (ETFs) are a useful vehicle to grow wealth. Dawn Ridler, of Kerenga Wealth Ecology, explains the key characteristics of ETFs, how they differ from collective investment schemes like unit trusts or mutual funds, and how they generate returns. Ridler shares tips on good starting points for investors who are new to the world of funds – and ETFs in particular.

Exchange Traded Funds (ETFs) have mushroomed across world markets as investors wise up to the idea that they can be attractive vehicles to build wealth. But, along with this proliferation, ETFs have mutated. While some are still excellent investment options, others are best left alone.

In this personal finance podcast, Dawn Ridler – a money expert in Johannesburg who has a refreshing approach to demystifying money challenges – explains what ETFs are and shares some pointers on how to assess ETFs with a view to deciding whether you should invest.

“An Exchange Traded Fund mimics or tracks an index. So for example the JSE Top 40 index. They track the major indices. Now there are thousands of them, tracking all sorts of things – some of them quite remote,” Ridler points out.

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Also read: Despite JSE blues, best inflows in 10yrs for US-traded SA ETF

“They do what the market is doing on a daily basis. You don’t need a human to make investment decisions for you. The computer does it for you. Because they’ve taken that active management role out of it, that has brought down the costs enormously,” says Ridler.

She explains why a significant difference between ETFs and collective investment schemes like unit trusts or mutual funds is the cost structure. Unlike ETFs, which are managed by sophisticated computer programmes, collective investment schemes are managed by individuals who make decisions to buy and sell assets and “all have to be paid”.

Ridler notes that you can easily  pay 2.3-2.5% in annual costs for the active management offered by collective investment scheme providers. However, “despite being active and with real humans trying to find out what’s going on” these funds haven’t performed.

“They are ‘proudly average’. Why be proudly average and pay 2.5% when you can pay lower costs, of half a percent?” asks Ridler.

A fee of 2.5% doesn’t sound like a big figure for a professional fund manager to beat. Ridler explains why a fee that looks small can be a massive knock to your wealth building efforts.

Also read: Investors climb into ETFs, reject old-fashioned asset managers – The Wall Street Journal

“We have to look at real returns. Real returns in the South African context, over the last three years, in equities, has been virtually zero. Real return is the return, say it is 5%, minus inflation, which is 5%, gives you a real return of zero. That means the purchasing power of your rand cannot grow.

“You need your purchasing power at the very least to keep up with inflation, if not more,” continues Ridler.

There are other fees to consider too, like platform fees and advisor fees. “You need at least 7.5% before fees for your money to have done anything. We haven’t seen 7.5% returns on the equity side for last three years,” she notes.

There are ETFs that trade in South Africa that provide exposure to global markets. The problem with investing in global ETFs listed in South Africa, says Ridler, is that “sometimes the exchange rate acts in our favour and sometimes it doesn’t and global currents can also impact on the global returns”,

How do investors understand  ETF costs? Ridler explains where to look for fees and also cautions that ETFs in South Africa are more expensive because of a “critical mass issue”.

Also read: ETFs suck in money: What they are, how to choose – investment expert

Offshore ETFs – ones listed offshore as opposed to global funds listed in South Africa – can be a better idea, suggests Ridler, as you can get exposure to the S&P 500, for example.

Ridler, like investment guru Warren Buffett, reckons an S&P 500 tracker – a fund that generates the returns of the biggest companies listed in the US – is a good idea.

“Take a long term view. The rand will continue to depreciate because our inflation is way above everyone else’s – even in the emerging world. In terms of purchasing power, until we bring our inflation rate down, the rand will continue to depreciate,” says Ridler.

For more insights on managing your personal finances:

Making sense of the NHI and your future medical costs – money expert Dawn Ridler

How short-term thinking kills long-term wealth building – Dawn Ridler

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