Exposure to the local equity market via ETFs
Most of us are aware of the importance of balance and diversification when building an investment portfolio. Typically, you should look for exposure to multiple asset classes and geographies to mitigate risk, which would be weighted according to your goals, risk tolerance, and investment time horizons.
Local equities are a key building block in a diversified investment portfolio. They are typically held as a "growth" or "risk" asset in a portfolio. This means that as a more volatile asset class, equities have the potential to gain and lose value at higher rates than a more stable asset class, like for example fixed income, but it is important to have a core investment in growth assets over time to maximise growth in your portfolio.
One way to access local equity markets is via Exchange Traded Funds (ETFs). You can think of traditional ETFs as listed unit trusts that are passive in nature i.e., they follow a formula to select the underlying stocks instead of relying on research and active stock picking. This formula is the index rule book, and because they follow a set of rules issued by the index and don't rely on active managers and research, they can be issued at a far lower cost than traditional unit trusts. ETFs are exchange traded and so they bought and sold via your stockbroker like a normal share.
ETFs can offer numerous benefits to both experienced and novice investors for the following reasons:
Choosing the correct ETF can be a daunting task, but there are several factors to consider when making your decision.
Two examples of ETFs that give efficient access to the local SA equities market, are the FNB Top40 ETF and the FNB MidCap ETF. The FNB Top 40 ETF invests in the 40 largest companies listed on the JSE based on their market capitalisation. Some of the largest constituents in the fund comprise of Anglo American plc, Naspers Ltd, FirstRand, Standard Bank, MTN etc. The FNB MidCap ETF comprises the 85th to 96th of the full market cap value of all eligible securities on the JSE. Stocks like Nedbank Group, Bidvest, Sibanye, and Impala would comprise some of the largest constituents in the fund. Whilst the FNB Top 40 ETF has more rand-hedged stocks, the FNB Midcap ETF is more representative of "SA Inc" and has more locally based stocks. Both ETFs distribute quarterly dividends, providing an income stream for investors. The FNB Top 40 ETF has been voted as South Africa's best exchange traded product (ETP) when considering tracking efficiency over three years, in the annual South African Listed Tracker Awards (SALTA) for two consecutive years (2022 and 2023).
In summary, ETFs can be an excellent way for investors to participate in the local equity market as they offer broad exposure via diversified baskets, whilst mitigating risks associated with individual stock selection. They offer transparency, ease of understanding, low investment thresholds, and stringent regulatory oversight.
Further information on the full range of FNB ETFs can be found here:
