MAKING YOUR FIRST INVESTMENT IN EXCHANGE TRADED PRODUCTS (ETPs)

Transcription

1 MAKING YOUR FIRST INVESTMENT IN EXCHANGE TRADED PRODUCTS (ETPs) Mike Brown, Managing Director, etfsa.co.za August 2013 Introduction Even if this is your first investment into the share market, don t be scared Exchange Traded Products (ETPs) have been designed to be simple, easy to understand, transparent and to give exposure to a diversified basket of shares listed on the JSE. You can make investments in ETPs from R1000 for lump sum (once-off investments), or you can do monthly (recurring) investments from R300 per month through debit orders utilising the etfsa Investor Plan transaction platform. Of course, these are just the minimum investment amounts accepted, you can invest considerably more than this if you wish. All you have to do is to fill in the New Business Application Form; select the ETFs or ETNs you want to invest in; and send the application form to us, together with certified copies of your ID document, proof of address and proof of your banking account details. etfsa Investor Plan enables investors to transact and access information on all ETPs available on the JSE (currently over 60 products), by making information on all ETPs easily available through its website ( You can download quarterly fact sheets; daily price and product information (product profiles); performance data; product descriptions; and other product information. If you are unsure about which ETFs suit you or financial needs best, you can: Approach a registered financial advisor (FSP), licensed to provide advice on Collective Investment Schemes or JSE listed securities, to assist you. Approach etfsa.co.za for advice, as we are licensed Financial Services Providers. However, a full financial needs analysis would need to be conducted in order to meet the FAIS legislation requirements for providing advice. Attend the monthly ETP Investor Seminars, held in conjunction with the JSE, at the JSE offices in Sandton, to learn more about ETPs. Contents Page How to Invest in ETPs through the etfsa Investor Plan 2 How to Fill in the Application Form 2 Why Use ETPs for Investment? 3 What ETPs Should I Consider for Investment? 4 Selecting ETPs 6 Article in Sunday Times Everyone s Door to the Exchange Exchange Traded Funds Allow Small Investors to Join the Market (10/2/2013) by Brendan Peacock 7 1

2 How to Invest in ETPs Through etfsa Investor Plan Application Forms The New Business application form can be accessed on the etfsa website, click on the How to Invest button or window on the Home page. To fill in the application form online, To download the application form, You can then fax, or scan the completed form to us. Investment Amounts Investment Instructions You can invest from R1000 minimum for lump sum investments. There is no limit on the maximum sums invested. Debit order investments can be made from a minimum R300 per month per ETP Fund. Again, there is no limit on the maximum debit order investment. You can sell all, or part of, your ETP securities at any time by filling in a resale/repurchase form ( You can switch between any of the ETPs available on the etfsa Investor Plan, by filling in a switch form ( %20switch.pdf). How to Fill in the Application Form 1. We need your full personal details in Section 1 of the Application form (page 3). 2. Fill in the amount you wish to invest, choosing the ETFs/ETNs you wish to invest in listed in Section 6 of the application form (pages 5, 6 and 7 of the application form). 3. Provide full details of a bank account in your name in Section 7 (page 7). 4. Sign the application form on page 9. If you have filled the application form online, the Administrator will send you page 9 to complete and fax/scan back to them, so they have a record of your signature. 5. Send in certified copies of the following documents: Clear copy of your ID Document Clear copy of your Proof of Residence (proof of residence older than 3 months will not be accepted). Clear copy of your Proof of South African Banking Details (must reflect bank name, account holder s full name and bank account number). No internet and credit card banking details will be accepted. Clear copy of the Proof of Deposit, if investing in lump sum. 6. Third Party Investments You can invest on behalf of your children, grandchildren, or people that you employ, by opening an investment in their name. Section 1 of the application form must be filled in with the details of the person for whom the investment is made. Section 2 must be completed by you as the Third Party investor. Section 3 must be completed and signed by the parents, if the investment is in the name of a minor. 7. Investments by Companies, Close Corporations, Stokvel/Investor Clubs, Partnerships, etc. You can invest in etfsa Investor Plan through any of the above vehicles. Please check pages 10 and 11 of the application form to determine the FICA documentation required. 2

3 Why Use ETPs for Investment? Transparency ETPs are listed securities, traded on the JSE. They have live prices available for surveillance at any time during the trading day. Value You buy one Exchange Traded Product and you get exposure to an entire portfolio of listed securities. You only pay stockbrokerage charges once. There is no securities transfer tax (STT) payable. This is the most cost effective way to invest in the JSE. Diversification The index constituent shares you own when you buy an ETP diversifies your risk and adds to your performance potential. ETPs provide a cost effective way of holding a basket of only the best shares on the JSE. Clarity ETPs publish their portfolios on their websites every day. You know exactly what you are buying and what you own at all times. Simplicity Your ETP gives you access to the total return (capital plus dividends) of a whole basket of shares. Buy one security and you get ownership of a full basket of top performing companies. Owning the index through ETPs is simple and profitable. Low Costs The issuers of ETPs typically have management costs, usually less than one-third to one-quarter of these of equivalent products, such as unit trusts. High costs do not eat into the long-term performance of your ETP investment. Easy Access You can purchase, sell, switch or transfer any of the ETPs listed on the JSE at any time through the etfsa Investor Plan. Investments can be made for any amounts, with reducing costs for large investments. The annual administration and management fee of 0,7% or less, charged by etfsa.co.za, covers all transactions, administration, registration, custodianship, reporting, statements, tax certificates, etc, for a 12 month period. A 0,1% stockbrokerage charge is levied for each transaction. Tradability You can sell you ETPs at any time; reinvest dividends automatically; do switches between ETPs; change debit order instructions; do additional investments, etc, all on one platform the etfsa Investor Plan. 3

4 What ETPs Should I consider for Investment? Start-Up Investments Obviously, we cannot provide specific investment advice without undertaking a full financial needs analysis of a prospective investor to comply with FAIS legislation. However, as a broad guideline, the following are the most popular ETFs which might be considered for start-up portfolios. Start-Up ETFs Past Performance (% Total Return*) ETF Fund 1 Year 3 Years (per year) 5 Years (per year) Comment Satrix INDI 25 ETF 38,39% 31,72% 22,31% Satrix DIVI ETF 8,46% 14,57% 17,03% RMB Top 40 24,84% 19,10% n/a Proptrax SAPY ETF 8,63% 17,40% 18,25% DBX Tracker World ETF 45,93% 24,92% 8,73% Low risk fund. Top performer amongst all unit trust/etfs Invests in companies that pay high dividends. Most efficient way to purchase top 40 shares. Invests in Top JSE listed property shares. Good way to diversify a portfolio. Invests in a portfolio of 1600 companies listed on 24 stock exchanges around the world. Source: etfsa/co.za/profile Data (August 2013). * Total return measures price appreciation with dividends reinvested. Note: There is no certainty that historic total return performance will be repeated in future. You can invest in just one of the above ETFs, or pick more than one from the above list, or choose any other of the more than 60 ETFs/ETNs available on the etfsa Investor Plan. Please note, this does not constitute financial advice, this table is purely shown for illustrative purposes. 4

5 Asset Allocation Portfolios Many investors on the etfsa.co.za platform choose to invest in more than one ETF, often looking to structure a portfolio of ETPs across different asset classes, asset sectors and investment types. Typically, it is prudent to diversify a portfolio amongst different types of investments for the following reasons: to diversify (which reduces risk); to enhance performance potential; or to meet specific investment requirements. Some of the more popular ETPs that can be considered as part of a balanced portfolio include: Asset Allocation (Balanced) ETP Portfolios Asset Sector ETP Fund Asset Allocation % Total Return Over 3 Years Alternative ETPs to Consider 1. Domestic Equity Market Broad Market Exposure (Top 40) JSE Sectors BettaBeta EWT 40 ETF 10% 18,17% Satrix 40 / Satrix SWIX ETF RMB Top 40 ETF Industrial Satrix INDI 25 ETF 15% 31,72% - Financial NewFunds erafi FINI 15 10% 22,30% Satrix FINI ETF ETF 10% 14,57% Satrix RAFI ETF / RMB MidCap High Yield/Diversification Satrix DIVI ETF ETF / NewFunds Equity Momentum ETF 2. Foreign Markets World Markets DBX Tracker World ETF 10% 24,92% - USA DBX Tracker USA ETF 15% 29,33% DBX Tracker Eurostoxx 50 ETF Emerging Markets DBX Emerging Markets ETN 5% 13,48% DBX China ETN / DBX Africa ETN 3. Local Bonds Inflation-Linked Bonds RMB Inflation-X ETF 10% 10,06% Investec zgovi ETF / NewFunds ILBI ETF 4. Listed Property Listed property Proptrax SAPY ETF 10% 17,40% Proptrax Ten ETF 5. Alternative Assets Commodities Gold NewGold ETF 5% 13,94% NewPlat ETF Average Portfolio Performance (per year). 100% 21,33% Note: Historic % Total Returns Performance many not be repeated in future. Source: etfsa.co.za / Profile Data (January 2013). A portfolio allocation of this type would meet most prudential compliance requirements, including the Balanced Portfolio Asset Allocation % of Portfolio Regulation 28 exposure requirements pertaining to Domestic Equity Market 45% South African retirement funds. Foreign Equity Market 30% The average annual return of the above portfolio, Commodities 5% over the past three years, would have been 18,85% Domestic Bonds 10% per year. Listed Property 10% 100% The ETPs suggested are indicative only and you can choose alternative products or a different asset allocation, if you wish. This is provided merely for example and does not constitute financial advice. 5

6 Selecting ETPs The etfsa.co.za website ( provides extensive information on all the ETFs and ETNs available in South Africa, to help you decide which products to choose. A good guide is often to consult the Monthly Performance Surveys, which appear on the website at the end of each month. However, should you require further guidance or advice, please consult a registered Financial Services Provider (FSP). Please check to see that they are registered with the Financial Services Board and have the current licenses to advise on Collective Investment Schemes or JSE listed securities. Alternatively, etfsa.co.za, which is a registered Financial Service Provider, can provide advice. However, in order to do this, we need to conduct a full financial needs analysis of your financial circumstances, risk profile, objectives and financial requirements. This is only really worthwhile if you are a significant investor. For more general guidance, you may wish to attend the free ETP Investment Seminars, that etfsa.co.za holds on a monthly basis with the JSE as partner. Details of these Seminars are on the website. Periodically, ETP Investment Seminars are held in other major centres around South Africa. Terms and conditions: Redistribution, reproduction, the resale or transmission to any third party of the contents of this article and this website, whether by , newsletter, internet or website, is only possible with the written permission of etfsa.co.za. etfsa.co.za, its sponsors, administrators, contributors and product providers disclaim any liability for any loss, damage, or expense that might occur from the use of or reliance on the data and services provided through this website. etfsa.co.za is the registered trading name of M F Brown, an authorised Financial Services Provider (FSP No 39217). etfsa.co.za is licensed to provide financial services in the following categories: Collective Investment Schemes; Shares and Securities; Retail Pension Fund Benefits; Short-Term deposits; and Friendly Society Benefits. Professional Indemnity Insurance is maintained. etfsa.co.za, and etfsa The Home of Exchange Traded Funds are registered trademarks in the Republic of South Africa 6

7 Article in Sunday Times 10/2/2013 Everyone's door to the exchange by Brendan Peacock, February , 11:41 EVEN if we have the time, knowledge and experience to pick good shares, most of us are intimidated by our lack of experience and we fear the administrative rigmarole. It can also be quite costly. This is why some types of collective investment schemes are growing rapidly in popularity: they are easy to understand, can be cost-effective and relatively low-risk. Here is how to get in at the shallow end. The local collective investment schemes industry had a good year in 2012, attracting unprecedented inflows from South Africans keen to get inflation-beating returns on "discretionary" investments - money that is not already directed at retirement investments and investors can afford to part with. Why? Because a lot of the work is done for you. Exchange-traded funds (ETFs) and exchange-traded notes (ETNs) are pre-constructed portfolios of shares (local or cross-border), commodities, currencies and other products that you would probably battle to pull together yourself. Michael Brown, MD of ETFSA, said because these funds or baskets were not single shares, the investment risk was reduced and the performance potential raised. "A second feature is the small lump sums required to get into an ETF: a lump sum of R1000 or a monthly debit order as low as R300 is all that's required to get in, whereas most stock brokers have higher hurdles to get into portfolios. You just have to fill in the application form on the website, or download it and fax it back to ETFSA - it really simplifies investment," he said. "They're very innovative but very simple at the same time. There is plenty of scope and choice." With an ETN, it is the issuer - the company that creates the index of products you buy into - that must provide the total return. It is important to make sure the issuer is credit-worthy, but only the big four banks - some of the largest companies in the country - are issuing ETNs, so they are quite safe. "The JSE's listing requirements only allow a significant issuer to issue an ETN. There is no guarantee, so do your homework, but at this stage I don't see any issuer risk. "When it comes to ETFs, these are simple, transparent portfolios and information is published daily. You can check the pricing of included stocks, as well as the equity risk involved. Structural risk is limited - the issuer takes on the risk and all assets are legally obliged to be held in a defined structure to protect the interests of investors," said Brown. These investments are regulated by both the JSE and the Financial Services Board. 7

8 "You can only buy them through brokers or providers like ETFSA. They are highly regulated and involve significant compliance. With an ETF, all the shares you buy are listed in your name on the JSE, just like a normal security, and that provides a safety net. You can sell at any time." Buying into ETFs and ETNs may be easy, but there is still some learning to do beforehand. A financial needs analysis is usually required to find out which exchange-traded products would suit your risk profile, which can mean visiting a financial adviser. "We try to help by providing as much performance data as possible: you can run a daily watch list, look at inter-daily price movements, graphs and even pick the best performers, much like you can with unit trusts. Or you can ask us - we are qualified to give advice," said Brown. "In general, my advice is to spread your risk - choose different asset classes. Remember, exchange-traded products are for discretionary investors, so it's important to make the right choices." What about the costs? "We have to use a third-party administrator and they charge an annual fee of 0.8%. This equates to an R8 fee for every R1000 invested. There are no upfront fees - they are deducted pro rata four times a year. The only other fee is 0.1% brokerage to buy shares (R1 on R1000). The annual transaction fee of 0.8% includes switches, which is very cost-effective." When you want to sell or switch products, you fill in a form and your holdings are sold the same day. The transaction is usually cleared in five to seven days after going through the settlement system. Sales are also included in the 0.8% annual fee. "It's better to stay invested and a recurring debit order is probably the best way to go - the debit orders are also included in the annual fee," said Brown. "This is a great way to start with self-directed investing. It is simple and easy to do, but while it's safe, investors need to show some common sense. Do some research and don't be completely unprepared. "There are significant numbers of South Africans buying into exchange-traded products now, and mostly not in big amounts of money. Once people buy into their first ETF, we find they get interested and tend to buy into more exchange-traded products and then go on to individual shares once they learn how the game works." ETFSA runs monthly free seminars; the next one is on February 26 at the JSE in Sandton, Johannesburg. "We'll soon be taking these seminars around the country," said Brown. For information go to 8