THE EMERGING ETF TREND.

Donna M. Nemer, Director, Capital Markets and Group Strategy at the Johannesburg Stock Exchange (JSE) explains how the product is being adopted in South Africa and its neighbours.

At the end of 2016 assets invested in the global ETF/ETP industry were US$530 billion larger than the assets invested in the global hedge fund industry (source HFR). What are the drivers behind this growth?

Investors typically seek investment products which are liquid and cost effective. ETFs are essentially much lighter on fees and afford investors a much more flexible and creative product that enables higher net returns. They track the market or index, and evidence has shown few actively managed funds can outperform the market consistently. In addition, they are cost effective in that investors can purchase a diversified basket at a fraction of the cost, compared to buying each underlying stock individually. ETFs are known for their transparency, assuring the investor of the exact underlying exposure he/she is receiving plus they are tax beneficial – any purchase of ETFs listed on the JSE exempts the buyer from Securities Transfer Tax (STT).

Is this trend replicated in emerging markets? What are the trends in your markets? Is the growth also escalating and if so, why?

The trend hasn’t been truly replicated on the same level in the SA market. The local hedge fund industry growth has largely tapered off and ETF market capitalisation has remained mainly stable with a slight decrease in 2016 compared to the previous year. This is mostly due to a decrease in commodity based ETF prices off the back of lower commodity prices. However, there was positive growth in terms of number of ETF listings with 2 ETFs during 2016 and 3 in the first quarter of 2017. When considering emerging market passive equity strategies, the industry has seen cumulative inflows of roughly R110bn over the last 13 years, according to WisdomTree, EPFR and ETFGI. This rate of growth in inflows is on a par with global trends, albeit off a smaller base.

Last November, the JSE listed two new global ETFs, the CoreShares S&P500 ETF and the CoreShares S&P Global Property ETF – what were the objectives behind this? 

With the launch of the CoreShares S&P500 ETF and the CoreShares S&P Global Property ETF, investors are now given additional investment options to gain exposure to offshore markets. The S&P500 is one of the most recognised indices in the world and SA investors now have access to this iconic benchmark. Similarly the S&P Global Property ETF is the first SA ETF that tracks an offshore real estate index which will provide further portfolio diversification.

How are institutional investors using ETFs in South Africa and emerging markets?

The institutional market is still mostly unit trust focused, however, exposure to gold and other commodity ETFs has helped elevate ETFs as attractive investment options, mainly because they are liquid and fall within their investment mandate. Some smaller firms use ETFs for cash equitisation purposes but core satellite strategies are currently limited to mostly structured products. The influence of smart beta is still fairly new in South Africa, but we are increasingly seeing an increase in strategies that select market factors that generate long term outperformance.

Do you think it will develop along the same lines as in Europe and the US for example – where you are seeing a more active use of ETFs – to overweight or underweight sectors?

The local ETF market has definitely seen growth over the last 16 or so years. AUM is roughly R70bn comprising of 52 ETFs listed on the JSE. Although the market is still very small compared to the global ETF market, there is evidence to show that ETFs are gradually becoming more well-known and popular. There have been five ETF listings in the last four months alone. In markets that have typically large single stock concentration, like South Africa, ETFs have not yet reached their full potential.

What is the JSE future plan in the ETF space?

Creating better awareness of ETFs for institutional and retail investors remains a key objective. The JSE has also embarked on supporting the National Treasury and the broker community with the Tax Free Savings Accounts which are ideally suited for ETFs. The JSE has also started to collaborate more with ASISA (The Association for Savings and Investments South Africa) and the local ETF providers through a tailored ETF standing committee, aimed at developing the market further.

Along these lines, are you seeing a move towards smart beta ETFs?

There is interest in smart beta ETFs in the local SA market, with future potential for adoption at the same rate as in the US and Europe. Essentially smart beta combines active management and passive investing attributes. This includes strategies that are not based on traditional market cap weights but typically embody a theme or style such as low volatility, momentum, environmental, good empowerment status, Shariah compliant, dividends, cash flow, sales and book value. Smart beta global inflows were in excess of $45bn in 2016, according to ETFtrends.com.

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