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Exchange Traded Funds (ETFs) offer diversified exposure through a single investment, just like buying a box of biscuits and getting to enjoy a variety of flavours inside. But if you don’t know how to read a fact sheet or assess which ETFs you like, then there’s no way of knowing what’s in the box. We don’t buy biscuits without the packaging making it clear what’s inside. We shouldn’t buy ETFs like that either!

To help bridge the gap and enhance your understanding of what to look for when selecting ETFs and reading fact sheets, Siyabulela Nomoyi (Quantitative Portfolio Manager at Satrix*) joined me on this podcast. It offers an excellent learning experience for both experienced and newer investors in ETFs.

Listen to the podcast here:

Transcript:

The Finance Ghost: Welcome to the Ghost Stories podcast and on this edition we are speaking once more to Siyabulela Nomoyi of Satrix*. Siya, you are a regular voice on this podcast. You always bring not just great insights I think, but passion for the markets as well, which is fantastic. It’s a really big feature of how you conduct yourself in the markets. And anyone who follows you on X or any of the other social media platforms will know this about you. Certainly anyone who’s listened to this podcast.

And what I’m looking forward to today is we are going to dig into some real nuts and bolts around not just what ETFs are and the different types and all of that, but also how to understand them better, how to actually do the research, the really practical stuff around adding them to your portfolio.

So, Siya, thank you so much for joining me as always. It’s lovely to have you and I’m keen to dig in here.

Siyabulela Nomoyi: Hi Ghost, and hi to our listeners as well. Always great to be on your podcast. Third one this this year, hey! Officially a hat-trick.

The Finance Ghost: Season ticket.

Siyabulela Nomoyi: Yeah, who’s counting? But thanks for inviting me again. Very keen to dive into today’s topic and see if we can educate people more on ETFs.

The Finance Ghost: Yeah, absolutely. No, it’s great to have you and let’s dive straight in. It’s something I have discussed on this podcast before, I don’t think with you, is the concept of whether ETFs are active or passive. I know it’s something I’ve definitely debated with the likes of Nico. The point is that I think the mechanics of an ETF are passive in nature in that it’s a rules-based investment mechanism essentially, or investment structure. But you’ve still gotta decide which ETF you wanna buy, right? And that’s an active decision. No one else is gonna do that for you.

Let’s just set the scene here in terms of how broad ETF landscape is, because I think sometimes people underestimate just how active that decision is. It’s not like you have one or two or even three to choose from – there are a lot of ETFs aren’t there?

Siyabulela Nomoyi: I guess we’ll speak more about the JSE-listed ETFs today. But it’s quite remarkable how large the universe of ETFs is when you’re looking at it globally as well. I mean we’re talking about 14,000 or even higher than that in terms of ETFs which are listed globally. That’s a huge number and I think that’s like a quarter of the number of listed stocks worldwide. That growth has been really fuelled by the idea of indexation – so not trying to be “clever” if I can say that, and just tracking the particular index like the S&P 500 or the FTSE/JSE All Share index, which are traditionally known as passive investing – more vanilla index tracking in my preference, as there’s absolutely nothing passive about it. We’ll get to that later on. Innovation has quickly started to spin off other product ranges from that – sector ETFs, thematic ETFs, factor ETFs, there’s bonds, there’s money market and so on. And then moving away from equity-based ETFs as I mentioned, there’s innovation in other asset classes like bond ETFs, commodity ETFs.

And really the rise of retail clients. I think we spoke about that in our previous podcast, this really pushed providers to innovate even more on these products eventually to the point that you have raised, that clients start to need to actually take active decisions to switch between these exposures.

So in as much as you can look at it as passive investing, you have to actively decide on which ones you’re actually investing in. And then now we also have actively managed ETFs as well, which we can speak to as well later on. But pulling this back into the South African market, there are quite a lot of ETFs listed on the JSE – 115 to be exact, index tracking ETFs and active ETFs. So 115 ETFs Ghost – again approximately a quarter of the number of stocks listed on the JSE, if I’m not mistaken. But that number is even more significant if you look at it versus the number of liquid stocks on the JSE – probably looking at 90 to 100 very liquid stocks on the JSE. There are more ETFs than our liquid stocks which are listed on the JSE. Investors actually are looking at a very large universe to make decisions to which ones they want to hold on their investment portfolios.

So I think in our local market we have quite a broad number of ETFs, but in terms of themes that those ETFs can capture, there’s still lots of work to do there. There’s quite a lot of overlap from providers, first of all, and the other part is – well, when I say overlap, you have for instance, three or four providers which have an MSCI World Index Tracking ETF or an S&P 500 Index Tracking ETF. And in terms of the assets under management, there’s like 50% of the AUM in ETFs that are offshore equities, but providers issuing the same index track as I mentioned, and very low representation of multi-assets ETFs, bond ETFs as well. There’s around 15 or so bond ETFs, whether you combine that offshore and onshore. In terms of AUM, that’s only like 6% of the total market of the ETF. And then we have local equity ETFs with Satrix having launched the first ever local ETF – that’s why we’re here – listed on the JSE, Satrix Top 40, since 2000, so celebrating 25 years this year. And then there’s commodity ETFs and so on.

So there’s quite a nice universe of ETFs for clients to choose from. That is where their active decision actually comes in.

The Finance Ghost: Yeah, 25 years – that’s amazing actually. Congratulations! And talking 25 years, quarter of a century, something you mentioned there – more than a quarter of the stocks on the JSE. I suspect it’s even more than that actually from an ETF percentage perspective, because there’s been so many delistings on the JSE. I’m not actually sure what the number is. I think it’s 300 and something stocks on the JSE. But as you say, the investable universe, the practically investable universe is actually a lot smaller. ETFs as a percentage of the practically investable universe – very, very high.

And the other thing I just wanted to touch on, you mentioned some of the growth in international ETFs there and thematic ETFs and absolutely, there’s some fascinating stuff overseas. A perfect example – the other day I was looking at European stocks and obviously one of the areas that have done really well in Europe this year is defence stocks, because there’s had to be this big uptick in spend by European governments on defence because the US has kind of said, listen, it’s time that you guys pulled your weight. So that’s been great for European defence stocks.

And there the power of an ETF is you don’t have to actually go and do tons of research on each underlying one and try and pick the winner. Especially if you go in with basically zero knowledge, which I would say, on average is the amount of knowledge that any of us here in South Africa would have about European defence stocks. You’re not going to find too many people in the street who can tell you the difference between the European defence stocks and what each company does. So there’s a good example of where you can go and do something thematic on the global market. You can go find an ETF. You know – there is an ETF for that, as the old joke goes, and you can go and research it and we’ll talk more about how you research these ETFs just now on the show.

Then locally, as you said, lots of opportunity, lots of JSE-listed ETFs that reference international markets as well as local markets, many of which are of course offered by Satrix. And like you say, work to be done.

I think on some of the thematic stuff – on a few of these podcasts before, I’ve been calling for something like a retail ETF. It feels like we have this big retail sector on the JSE, but there’s no ETF that just brings it all together. We’ve got property ETFs, we’ve got resources ETFs, but we don’t have a retail ETF which would let you take a view on South African consumers in one instrument. So I think we’ll see more and more developments over time, and I hope to see some of this stuff coming through.

Before we get into some of the different types of ETFs though, I don’t want to lose that point around actively managed ETFs, because that’s a relatively new thing. Maybe we could just spend a minute understanding what an actively managed ETF actually is, and then I’m quite keen to dig into some of the other types of ETFs and some of the buckets that we’ll see.

Siyabulela Nomoyi: Yeah, so normally the clients would think of ETFs as this fund which tracks a certain index, and that’s what you get from it. If the return on the index was 10%, the ETF’s mandate is to actually get that 10%. But there’s another space, because when we look at the investment spectrum at Satrix, we’ll look at three one perspectives. So there will be the vanilla space, which will be just standard market cap weighting indices which can be tracked. And then you can move on to a more complicated part where you are trying to move away from the market cap weighting and tilting your weights towards a certain point in terms of whatever the conditions would be. So that would be your factor space. And then eventually, you get to a part where the recipe, you can’t find it on the internet. So it’s like – conviction, the provider will select stocks based on research that they’ve done. They will overweight those stocks based on that and they will change between styles. They’ll have be either a value manager at one point and then eventually there’ll be a momentum manager, they switch to quality and that changes with time. And you can’t – you don’t know how they determine that. They’ll just provide their active decision.

That segment of the market has been mostly through unit trusts or segregated funds. But there is a movement of people getting that exposure through actively managed ETFs where the provider has this way of creating a bucket based on whatever the recipe is, trying to beat a certain index instead of tracking that index. And then you have this bucket of those shares and then that will translate to this ETF that actually is feeding through that bucket of stocks.

Creation of the basket is no longer this vanilla way of weighting the stocks or the constituents in them, there is an active decision to actually create the weights or the constituents, moving them in and out of that ETF, so that the investment decision inside that bucket is actually active and then that translates into an ETF.

So that’s where these active actively managed ETFs are coming from. Their target would not necessarily be tracking an index – there will be an index, but they want to actually have a higher return versus that and they’ll switch between different indices or different constituents based on that. They no longer have to be constrained to the fact that they are tracking a particular index. They actively want to actually have a return that’s over and above a particular index.

That’s where the space has come from. I mean that’s been coming the last four, five years or so. And there’s quite a number of them listed on the JSE. If I’m not mistaken, there’s about 93 vanilla tracking ETFs and then the rest of that 115 is actively managed. I might have my numbers incorrect there, but they’ve been listing for some time now and the market has adapted very well on that.

The Finance Ghost: That is interesting. Look, I’m sure your numbers are pretty close to right. You’re willing to put 93 out there as a guess. Most people would just say, you know “roughly 90”, but Siya, you know your stuff. I’m guessing when you say 93 with that amount of confidence, I suspect you are not far off the mark at all.

Of course, within those 93 – that’s sort of the traditional ETFs, the way people understand them. And just for people listening to this, don’t get confused by everything we just talked about there with actively managed ETFs. That is a very specific type of ETF. It’s still a small part of the market. It’s not a traditional ETF in the way people really understand them, which is a very rules-based, index-tracking type of fund. That is essentially what an ETF is.

And typically when you say to people, oh, what are the, you know, big buckets of ETFs, the different types? I think the thing that would come up all the time is offshore versus local. I think a lot of investors understand that there’s an ETF for the S&P 500, there’s one for the Nasdaq, if you want to own the Euro Stoxx, if you want to own China, if you want to do MSCI World. And there’s a lot of overlap among providers, as you say, in some cases there isn’t. Sometimes there’s only one provider doing something specific. But then you get a lot of local ETFs as well that track not just the JSE Top 40, but the Resources index, some of the others as well.

So there are a lot of different buckets and I think offshore versus local is kind of the easy one. But obviously there’s some problems there in that for example, you go and buy a JSE Top 40 ETF – it might be local in terms of its JSE listed stocks, but they look-through exposure is so international in nature. I mean it’s Prosus, Naspers, Richemont, British American Tobacco, gold stocks – these things are not based on what’s going on on the ground in South Africa, which is really interesting. But you’ve actually highlighted some other types of ETFs in one of your earlier discussion points here on this podcast. I think let’s just touch on some of those buckets, because local versus international is just one of them. There are other different buckets that you can use to categorise ETFs, right?

Siyabulela Nomoyi: Yeah. So I mean just to go back to what you were saying Ghost, I think it’s a very important point in terms of just the look-through when you’re looking at the indices because that also just helps clients in terms of what they’re looking for when they’re looking at broader indices or something like the Top 40 index in as much as it’s locally listed stocks. If you’re looking at the revenue exposure on that it’s like 60% / 70% offshore. So you do have a listing onshore, but what you’re actually exposed to is outside South Africa.

And that’s a very important point because the primary reason why after the JSE decided to do the whole index harmonisation, changing the way that they weight the All Share to how the SWIX is actually calculated, therefore just upweighting the more SA in stocks because the All Share, if you’re looking at it, its history it was more offshore. But the way that the SWIX is weighted is looking at is what the STRATE ownership is and then that’s eventually upweighting the SA Inc part. And then eventually Satrix also after that we launched the Global Investing ETF which is also just giving you total rand hedge exposure as well. And then the SA Inc will sit on the SWIX.

So it’s very important to – just apart from the fact that it’s a vanilla tracking index that’s giving you locally listed ETFs. If you’ve got the information and if you’ve got the data, you can actually look even further and see what kind of exposure you’re getting from there. So what you’ve mentioned now is that this is where people actually need to start putting in some work Ghost, because there are layers to actually uncover when you start talking about the types of ETFs.

One of the podcasts that I’ve recorded with you is that you made this cool example about ETF investing, likening it to someone walking into a store I think and there’s different aisles to actually go through where they can go and pick what they want according to what they wanted in their basket at that time. And I think it’s a great example because even in that case when you go into an aisle of let’s say biscuits, you’re not only going to see one type of or one brand, you will have to look into what’s on offer. So different brands of biscuits. From that 115 ETFs that I’ve mentioned, sticking to your example, investors can work through these aisles where they can divide the shop in half. Then one side is the offshore side and then the other one is the local ETF exposure side.

And then if you start on the offshore side, they’re able to select ETFs that give you exposure to offshore equities and then to decide what they feel like. Something like a US-flavoured ETF like this one that’s actually tracking the S&P 500 index. Or they could be looking at the Nasdaq-tracking ETF, or they would like an Asian flavour by looking into the China tracking ETFs like the Satrix China ETF, or Satrix India ETF. So investors can actually have country specific exposures.

Or, they could even – using the biscuit example – they could go to Choice Assorted where they buy this box filled with different biscuits in it – it could be an ETF like the Satrix MSCI ACWI ETF that’s got 23 developed markets and 24 emerging markets exposure. So that’s all in one. You don’t have to go and pick each of those different types.

But still sticking to the offshore side, there’s also a choice of offshore nominal bonds as well like the Setrix Global Bond ETF. Then there’s quite a lot of thematic exposures in that offshore side to choose from. If there’s interest in infrastructure, ESG, offshore property and so on.

That’s quite a long answer Ghost. But when you move to the local section, you get the same in terms of the types of ETFs but the themes actually change when you come to South Africa. There’s plenty of equity tracking ETFs like the Top 40 and others and local bonds, whether you’re looking at nominal or ILB. There’s also a choice of whether you want specific sector exposure. So, you want property exposure, you want RESI, you want INDI, you want Financials – it’s your choice. Or you can even take it further. If you want high dividend yield stocks you also get an option actually to buy an ETF that tracks stocks which historically pay high dividends, so that’s also available there.

And then lastly, staying on the shop and aisle example because I love it so much. So now you leave all the aisles and go to the back section of the shop where there’s ready-cooked meals and you can sort of put stuff together. Put a plate together and it’s ready and wrapped for you. And that’s where the multi-asset ETFs come in. So it’s a mix of different flavours of different foods or different types of foods, they’re all wrapped into one. That’s where you get exposure to equities, bonds, properties offshore and so on, all in just one plate and it’s all wrapped up for you and ready to go. So those would be the different types of ETFs that you can get and how you can actually go about looking at which ones are available.

The Finance Ghost: Yeah, I love the biscuits example. So we’re recording this on a Friday and if your Formula One t-shirt didn’t give me a clue that you’re ready for the weekend, Siya, I think the biscuits example certainly does. I love that that’s your go-to. I think it’s great that you can kind of walk down the aisles and pick and choose what you’re looking for. And we’re going to start speaking shortly about how you research and understand these ETFs. And that’s really how you look at what’s on the box and say, well, here’s what’s inside, what do I feel like?

But I think before we get there, there’s definitely – aside from talking about lots of other ways to slice and dice this, like market cap weightings and equal weightings and factors and all of that, maybe we’ll see if we have time for that at the end because I don’t want to lose the point around the MDD research, that’s minimum disclosure documents – but before we get to that, what we need to talk about is the different risk profiles across all these ETFs, because I think that is an important point to land for anyone listening to this podcast or reading this transcript.

ETFs do not have equal risk profiles. They might all be ETFs, they might all be tracking an index, but they have very, very, very different underlying risk profiles, right? What should you say there to help someone as they pick the biscuits off the shelf, Siya? How should they think about the risk of those biscuits?

Siyabulela Nomoyi: So just going back to conversations that I’ve had in terms of retail clients when they start investing, the excitement of getting a portfolio and they’ve deposited money and then they’re investing. They’ll be excited that they’ve got 10 ETFs in their portfolio. And then when you ask them what they actually have, you’ll find that five of those are actually S&P 500 index tracking ETFs from five different providers. And in their minds, the portfolio is diversified, whereas it’s literally giving you the same thing. It’s the same index, same risk profile, just different providers, different fees that you’re actually getting.

So I think from that, people have actually moved on in terms of understanding what the difference is. But what I’m trying to say is you might have different providers, if they have got the same tracking index, it’s going to give you the same being the same risk bucket. So you need to understand what that risk means in terms of the different types of asset classes. That’s the first one. And then the other part is: how do you actually measure risk? It’s quite a tough one to explain, and also just make sure that an individual on their own understands it from their point of view in terms of what they want at the end – I think that the very important part here is the end game.

I think that the understanding of risk from clients has evolved and there’s much better understanding of it, though there’s still room for improvement here, which is why we get to record such podcasts as well. I think when it comes to risk, the client needs to understand it in terms of term. I always try to explain it in that sense – as in, how long are they willing to leave that money in that investment account? That’s the first part. So if they know that term, they’ll start to know which products actually fit in that term. Everything else really just is a spin off from that.

If you want the money to be invested, for instance, for the next 20 years versus you want the money next year January, there’s absolutely no way, no chance that you can take the same risk for those two terms. If you want the money in 20 years versus next year January, you can’t take the same risk on that. But what does that actually mean? The basic thinking behind investing, I think everyone who’s listening to this agrees that for any individual, if you buy into an asset with R100k, by the time you take out that money, you should have more than R100k after the fees. And that that R100k must have grown in such a way that it still has the same or even better buying power than when you invest it. So that’s real return versus total returns, which we can go back to and have different podcasts for that.

But that buying power needs to be there with that hundred bucks. If it was affording you a loaf of bread, milk and slice of polony or whatever, that hundred bucks, that should be there as well.

The Finance Ghost: Sho, I preferred the biscuits. Definitely preferred the biscuits to the polony, Siya.

Siyabulela Nomoyi: Yeah, exactly. So if it was buying you a box of Choice Assorted for 100 bucks, this is more expensive than that anyway right now. At whatever time you want to pull out the money, it still needs to buy you that basket of biscuits and even more if possible. That’s what you want when you’re actually investing.

So what are the chances of a major loss when you invested that 100 bucks in the next year? Would it not be better to actually protect that capital rather and gain some interest or money market rates on it in the next six months? Or are you prepared to put it in an asset where you have seen major drawdowns in short periods of time? So that’s where the measure – now talking about the drawdowns, whether you can lose a lot of money in the next period or not.

That’s where the history of the asset class comes from in terms of what they’ve done historically. I think we spoke about drawdowns in the last podcast and how you measure that. So when it comes to longer term, that question actually just tends to be a bit easier to answer and people can then start taking more riskier assets into their portfolio, like foreign equity exposure and also even our onshore equity markets, which have done very, very well actually in the last 10, 20 years.

But then here you start trying to skin the cat in different ways – no cats harmed during this recording of this podcast, Ghost! Sure you can take risks, but it is rewarding over the long term. And the ETF you will consider here in order to actually diversify your overall portfolio, or whether you are doubling down on a certain theme if you hold certain ETFs, or really offering yourself the opportunity to have a good chance of good portfolio growth in that instance, ride out all the volatility you will experience in the next 20 years. That depends on if you are comfortable with that risk profile.

So each ETF listed on the JSE will tell you what the risk profile is. You will get these different statuses, whether it’s low risk, moderate risk or moderate-to-aggressive or aggressive risk. So that will feed into how long you want to actually hold your investment. The risk part of investing is quite tricky and I would encourage everyone, especially if they just started to really consider, to understand this part very well before they dive into the unknown. Most of the time this leads to panic trading. And I mean someone will put in the hundred bucks today – I think on social media people were posting about the All Share hitting a 100,000 points, first time in history. If they invested at that time and they come back now, it’s like 97,000 points, they panic because they don’t understand what’s going on or the risk of that investing on that type of asset class. It’s just a matter of understanding why it will move from that point to 97 all of a sudden, but it can actually move up again. How long are you willing to actually ride out those waves? And if you’re doing that panic trading and you’re constantly in and out of different positions, you’re eroding your investments because you continue locking in losses while you’re actually paying a lot of progress.

The Finance Ghost: Yeah, I agree. I’ve got to say, even within the high-risk bucket that a lot of these equity – pure equity funds would get put into, I mean there’s high risk and then there’s very high risk. If you buy an ETF that is a broad market index, it’s going to probably come through on the MDD as high risk because equity is high risk. But relative to going and buying a very thematic ETF on some or another kind of quite tech-heavy, I mean let’s use something crazy like a biotechnology ETF overseas – that is super high risk, but in all likelihood it’s kind of just going to get shown on the same risk bucket.

So again, this is why it’s important – yes, ETFs are passive, but the decision to invest in them is active. And the research that you need to do to understand this is active. And I definitely want to spend a few minutes just talking through minimum disclosure documents and fact sheets. I’ll tell you what I love the most about fact sheets actually is to look at the constituents. And that’s because I love doing the bottom-up, what’s in here kind of analysis. And if you go and you download any fact sheet or MDD for any ETF, it’ll show you at least roughly its top 10 holdings. Now what’s interesting with that is it’s a very good way to go and see, oh, you’re interested in the top 40. Okay, well there’s a Satrix 40 ETF and if you go and have a look at the constituents, that will actually tell you what is in the Top 40 of the JSE. You don’t even necessarily have to have a data feed from the JSE or whatever the case may be. You can just go look at the ETF for that sector and you can actually see what’s in there. It’s a really cool research tool as well. Let’s say you do want to go and do some detailed stock research on European defence stocks – I’ll just use that as another example – so you go and find the European defence ETF, which will be listed somewhere overseas. Go find the fact sheet – it doesn’t look that different overseas to what it looks like here. Go and look at the constituents and bam, there are your answers. Here are the biggest names in the game. Maybe you pick two or three to go read about as you decide okay, this is a sector I want to be invested in, I like the narrative that’s coming through from a couple of the biggest names, let me go and buy the etf.

So I think the constituents are very important part of any fact sheet. Stuff like fees as well, a bunch of other things. So, Siya, I’m going to let you bring us home on this podcast by walking us through just some of the most important areas to look at when you open up a fact sheet, you go onto the website, you find the ETF, you download the thing, you’re hit with this two or three page document. What would be the most important things to look at, for those who aren’t familiar with these things yet?

Siyabulela Nomoyi: The minimum disclosure document, so MDD for short. I’ll just say MDD throughout and other people call it fact sheets – these are actually the first bit of information that is applied to investors that is publicly available and providers have certain information that they need to disclose on it, required by regulations. And if we didn’t have MDDs online, we would answer be answering calls every two seconds because someone wants to know about the Top 40. They don’t have information online, they’ll have to call Satrix directly and they’ll have to talk to the…

The Finance Ghost: …tell us about your biscuits Siya, we want to know…

Siyabulela Nomoyi: …exactly, every two seconds…

The Finance Ghost: That’s what it will be. But it is actually – it’s like if that Choice Assorted box was just grey…

Siyabulela Nomoyi: Yes!

The Finance Ghost: …had no pictures and no information, right? Like, what’s in here? You don’t know. You’re not going to buy the biscuits. It’s actually a great analogy.

Siyabulela Nomoyi: Yeah, exactly. And then imagine the line with people with those grey boxes, the line going to ask the question about what is in this thing. So it’s very important to actually have that information at hand, publicly available and free. People can actually download that. We update these monthly, so the information there is quite fluid. If you go on the Satrix website, for instance, you will see that all our Collective Investment Scheme products, the unit trust ETFs which are listed on our website, each of them has own MDD. This is to help investors actually have all the basic information and very important information at hand and then to make an informed decision about what they would like to invest in.

So let’s take the Top 40 ETF as an example. You’ll see that I’ve been speaking about it quite a lot today because that’s a very big and very important ETF in our lives. If you open that on your side, the first thing you want to know as an investor is what does the fund actually track? So first and basic knowledge that this fund tracks the Top 40 index, the FTSE/JSE Top 40 index. And then the MDD will give you the information on that part. Sometimes it will be like a sentence or two, but it will describe that the index tracks, for example, the Top 40.

And then after that, what you mentioned now – the top 10, so just to give you a glimpse of what the fund actually holds. The top 10 can give you lots of stories. It can give you if the index, for instance, is quite concentrated. For instance, if you go in there and you find that one or two stocks are 50% of the index, right away you know that this is quite a concentrated index. Other ones will be very diversified index where the top one is like 4%, 5% and the weights don’t change that much, so it can also tell you the story about the concentration and how far it goes in terms of how big the constituents are in the index.

So for instance, you go to the Top 40, you’ve got Naspers as the biggest weight in there at the end of June this year, 14%. And then the next one is 6%, FirstRand and then so on and so forth. Then for interest sakes, just to see how that fund has been performing in the past, you can also look at the return profile, so that also gives you an opportunity to actually understand the return profile historically and you can understand the drawdowns that you can experience from that particular fund. This helps you have an idea of how it has done over the short and long term, over a year, three years, ten years, depending when it was launched. But it does not necessarily mean that this is how it will perform going forward. So if it’s done 10% in the last 12 months, it doesn’t necessarily mean that next 12 months are 10% as well.

The part that can well be important is the fund information bit, because there you’re told what the ETF’s listing code is, if you want to buy into the ETF. For instance, you’ll see that the Top 40 ETF is the STX40. So you can search for that if you want to invest in it, in whatever platform you’re using. And then you’re also told how much it will cost you. This helps, especially this issue of having different issuers or different providers having the same index. We’ve got three top 40 ETFs on the JSE, got four or 5 S&P500 or MSCI World indices. So you can literally just take those three providers, put them side to side, they are tracking the same index, but how do I decide which one I go? Okay, this is the TR for this one, it’s actually double the other one or it’s lower than the other one. And then you can also look at the tracking – how is the ETF better than the other in terms of tracking the index? And you can sort of choose from that.

It can help you choose the provider, understand the risk, understand the cost as well. And then you can actually make a very, very informed decision. People who really are interested in how much income for instance an ETF generates, the MDD will also show you this in the frequency of receiving dividends or the income here as well.

Going back to the part where we were talking about risk, the risk scale or the status is disclosed as well. For the top 40 it’s shown as aggressive, so this will make sense as the fund is an equity tracking fund. You can get moderate, you can also get moderate-aggressive and you also get low risk.

But your point there that you raised is very important to understand, that the equity tracking ETFs will have the same risk profile. That would be like aggressive, aggressive, aggressive. But you need to understand how aggressive it is based on whether you’re investing in a certain theme. You’re going to Resources, for instance, full-on Resources versus Top 40. Those might be aggressive, but one of them is actually more aggressive than the other. That’s where the return profile will actually tell you the story of how aggressive it is. So that can help you in terms of choosing which one based on what risk level you think you are.

So those are the important bits. The rest is really just for knowledge, like the size of the fund, how many people are investing in it, the last price and so on. As long as you get through the fund formation part, you should be good to make an informed decision, Ghost.

The Finance Ghost: Yup, Siya, I love it. There’s a lot of really good stuff in there. Thank you so much. I think that biscuit analogy will stay with me because I really do think it’s great. ETFs are those biscuits in the aisle. There are a lot of very sweet things to choose from and you’ve got to find your tastes, you’ve got to find what’s going to work for you. You’ve got to look on the boxes and decide what’s in there and if that’s what you want and all the different mixes that you can get and then compare the prices, of course, and then find what will work for you to put in your trolley.

Thank you for sharing a lot of really good insights into a part of the market that is just so important. You know, I say every time. ETFs are a core part of my portfolio. They are my building blocks. I love picking stocks. I definitely do that on top of my ETF exposure, but the ETFs are the foundation of that portfolio. They are obviously what you buy in your tax-free savings account – or at least what you are limited to buying in your tax-free savings account from an equities perspective, but that’s fine because there’s so much good stuff you can choose from. And that’s obviously what I do with my tax free savings – it’s all in ETFs.

So, Siya, thank you so much. It’s been another great show. Lots of cool stuff that we’ve covered here. In the show notes, I’ll include an example of a recent minimum disclosure document and the link where you can find them on the Satrix website. And Siya, I know you’re also very up to answering questions from people on the socials.

So if you want to chat to Siya on X or on LinkedIn, get hold of him, ask the questions, get hold of the team at Satrix, engage with them. They really do love what they do. Siya, thank you so much for coming back on the show and I look forward to the next one with you.

Siyabulela Nomoyi: Awesome. Thanks, Ghost. And thanks to loyal listeners as well. Always great to be here. Until next time, eh?

The Finance Ghost: Yeah, till next time. Thank you. Ciao.

*Satrix is a division of Sanlam Investment Management. 

This podcast was first published here.

For more information, visit https://satrix.co.za/products

*Satrix is a division of Sanlam Investment Management.

Disclaimer:

Satrix Investments (Pty) Ltd & Satrix Managers (RF) (Pty) Ltd is an authorised financial services provider. The information does not constitute advice as contemplated in FAIS. Use or rely on this information at your own risk. Consult your Financial Adviser before making an investment decision. While every effort has been made to ensure the reasonableness and accuracy of the information contained in this document (“the information”), the FSP’s, its shareholders, subsidiaries, clients, agents, officers and employees do not make any representations or warranties regarding the accuracy or suitability of the information and shall not be held responsible and disclaims all liability for any loss, liability and damage whatsoever suffered as a result of or which may be attributable, directly or indirectly, to any use of or reliance upon the information. For more information, visit https://satrix.co.za/products