The ABC of investing via ETFs

2015-03-02 14:55

There are more than 450 companies listed on the stock market, which can be a daunting prospect for a beginner investor. So, where do you start? Before you think of placing your first trade you need to know the following seven rules:

A. Successful investing requires a safe environment. Above all you need sufficient financial liquidity and/or insurance to ensure you are able to sell stock when you want to and not because you have to.

B. Getting fully invested as early as possible, at the level of risk appropriate to your risk profile, rather than leaving available money unutilised delivers the best financial outcomes over time.

C. Over time diversification delivers the best returns to all investors for the amount of risk taken, regardless of the investment amount.

D. The most certain drag on investment performance includes costs, fees and taxes. Make sure you know what you’re paying for and why.

E. Inaction delivers better financial outcomes than frequent buying/selling. Investment returns are about time in the market, not timing the market. Stock picking, currency speculation and market timing are usually costly over time and best left to professionals (if at all).

F. Short-term investment outcomes involve considerable luck and it is almost impossible to differentiate luck from skill in the short-term. In the long term, however, good investment processes are likely to pay off.

G. Long-term investment success requires being sufficiently emotionally comfortable with your portfolio to stick to your plans and follow a good investment process.

What are ETFs?

An exchange traded fund, or ETF as they are commonly known, gives you exposure to the underlying share or instrument it is tracking. So if, for example, you want to own all top 40 companies listed on the JSE you could either buy a share in each of these or you can buy an ETF such as the Satrix Top 40. This ETF gives you exposure to each and every company in the top 40 index without actually owning the share. The market maker, in this case, Satrix owns the underlying shares but as these companies pay dividends Satrix then passes these dividends to you on a quarterly basis. Your exposure to these shares is based on a pre-determined weighting. As this tracks an index, Satrix also offers a fair price and liquidity to help you buy and sell the shares at a fair price and easily. With this ETF you are now tracking the market and as these top 40 companies increase in value so does the share price of your ETF. The other nice aspect of this type of ETF is that if a company falls out of the top 40 and a new company enters the top 40 you don’t need to buy or sell any shares nor will the price of the ETF be affected. The market makers do all the work and they will adjust their holdings to ensure you are now exposed to the new company in the top 40.

An ETF can give you exposure to different shares at a cheaper cost. Other benefits include:

» Diversification: exposure to the whole market or asset classes.

» Liquidity: market makers provide full liquidity to enable you to easily buy or sell the ETF.

» Transparency: The ETFs constituent assets, holdings and investment methodology are published regularly.

» Lower costs: due to ETFs being passive in nature, they tend to have a lower fee structure than actively managed funds.

» Investor protection: ETF securities are fully backed by the underlying assets.

» Traded like a share: ETFs are funds listed and traded like ordinary shares on a stock exchange.


Because ETFs are not actively managed by a fund manager, they carry lower fees. The average ETF fee is about 0.45% a year compared with as much as 2% for an actively managed unit trust fund.

Invest in commodities such as gold

You always wanted to invest in gold but weren’t sure how? Now you can, via the Absa NewGold ETF.

When you buy 100 shares in Absa NewGold, the market maker (Absa) actually buys an ounce of gold. The price for Absa NewGold takes into account the price for an ounce of gold in US dollars and then converts this to the rand price, which gives you the price of 1 ounce of gold in rand terms. They also realise that not everyone can afford to buy an ounce of gold in one go so they divide that price by 100. This means that when you buy one share in Absa NewGold you own 1/100 of an ounce of gold. The added benefit is that, unlike when you buy physical gold or Kruger Rands, you don’t need to pay storage costs or find a buyer to offer you a fair price for your gold.

Risk and diversification

Risk and diversification are key points to remember when you invest. When you enter the stock market, you want to start off with a low-risk investment. This helps to build your investment foundation and gives you the opportunity to educate yourself. Diversification is the best tool to ensure you keep risk low and also helps to achieve better returns.

So, how does one diversify in the stock market? The stock market offers you a platform where you can invest in property, commodities (such as gold), different sectors such as finance or mining and even offshore. If you choose to diversify by just using companies to obtain diversification this can become costly. For example, if you try to get into different sectors such as property and finance you could buy shares in Redefine and Barclays but this could cost a lot. The best way to obtain diversification across the various sectors and asset classes is to make use of certain ETFs.

An ETF such as Absa’s NewFunds eRafi Overall SA Index ETF which offers you an opportunity to invest in the 40 largest JSE-listed companies ranked by fundamental value also offers you diversification in eight different sectors. In this case your biggest exposure is to the financial sector. The table below shows you a comparison in performance year-on-year compared to the All Share index of the JSE. You will notice that this is similar as they both track almost the same instruments but have different weightings.

To conclude, ETFs are said to be a must for all investors due to the low risk and steady growth over time. They offer diversification at a cheaper cost than what you would pay if you were to buy each share individually and can track anything from an index to a commodity.

For more information on ETFs and to invest in ETFs visit

Absa Stockbrokers believe in helping you become a smarter and better investor and have provided you with an educational video on ETFs which can be found on our website. We also have weekly ETF publications, which review the performance of ETFs.

ETF Shares Top 10 Holdings

ETF Performance History

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