As the Satrix 40 reaches two decades since listing on the JSE, Simon Brown takes a look at the history of exchange-traded funds and why they are a solid investment.
The 27th of November marks the 20th anniversary of the listing of the first exchange- traded fund (ETF) in South Africa – the Satrix 40 (STX40*). It listed at 774c and at the time of writing, it was trading at 5 267c.
Dividends received over the 20 years amount to another 1 517c, giving a total return of some 776% over the two decades. Not yet a ten-bagger, but a great return for doing nothing (aside from buying at listing).
When ETFs arrived in SA, they weren’t new globally, but they had not experienced widespread adoption.
In fact, when Jack Bogle launched his first index mutual fund in 1975, the industry responded by calling it un-American as it threatened their profits from active funds. The first listed ETF was in New York in 1993, tracking the S&P 500. The key difference with the Bogle index funds was that it was exchange traded, a feature that Bogle never liked as he thought this led to people trading their ETFs, rather than holding them passively for the long term.
In 1996, global ETFs launched in the US, and in 1998, sector-specific ETFs arrived. So, when our first ETF arrived in 2000, we were not that far off the trend. And we now have 78 ETFs on the JSE, with a further 48 exchange-traded notes (ETNs).
ETNs are very similar to ETFs, except that they do not necessarily hold the underlying asset(s). Instead, they use derivative instruments to mimic the return and, as such, carry counter- party risk if the issuer defaults.
The introduction in 2015 of tax-free accounts saw a renewed boom in ETFs, and research by etfSA shows that the total ETF and ETN market cap stood at just under R113bn at the end of September. Still very small compared to the active unit trust industry locally, but up almost 400% in the last decade.
This has in large part been enabled by the growth in the industry, but other drivers have been online platforms and reduced fees. I have written before that the idea of a few clicks online to confirm a purchase order on the JSE, with fees under
1% – often markedly lower – was a crazy idea back in 1999, even as the internet became mainstream. ETFs themselves are also very cheap, with total expense ratios (TERs) starting as low as 0.1%, and the most expensive under 0.9%. This compares very well against unit trusts, which typically average at around 1.5%. As an aside, the only unit trust I ever owned, in the late 1990s, charged some 5% before performance fees; it never performed, so I never paid the performance fee.
But somebody made money, and it wasn’t me.
The last five years has also seen an explosion of locally listed ETFs tracking offshore markets, which is perhaps the biggest impact on the sector.
Back in the day, buying a share or ETF listed in New York was an avalanche of paperwork, red tape and fees. Now it is also a case of just a few clicks and your order is processed on the JSE.
When the STX40 listed, a friend convinced me to buy some. I remember chatting to them about it two years later, and I mentioned that this ETF was boring. Their response has stayed with me ever since: “Long-term investing is meant to be boring.”
*The writer still holds some STX40 he bought in 2000, and many more bought in the decades since.