The ETF revolution: A global boom

In recent years, the global investment landscape has experienced an unprecedented surge in the popularity of Exchange-Traded Funds (ETFs). These financial instruments, once considered a niche product, have now become a dominant force in the investment world

In PwC’s recent report titled: ETFs 2026: The next big leap report, it was revealed that 58% of respondents expect global exchange-traded fund assets under management (AuM) to reach USD 18 trillion by 2026. An additional 84% expect online platforms to represent the primary source of future demand for ETFs.

The global ETF boom represents a fundamental shift in the way individuals and institutions approach investment strategies. ETFs have become the cool kid on the block, drawing in investors the world over with the allure of transparency, cost-efficiency, diversification, and tax benefits. As the ETF industry continues to innovate and expand, it is positioned to play an even more significant role in the future of investing.

Over the past few decades, traditional investing was synonymous with unit trusts and actively managed portfolios. However, the rise of ETFs has transformed the way individuals and institutions alike navigate their investment strategies. But what’s fueling this ETF revolution?

At the core of this transformation are several key factors that collectively explain the unprecedented global ETF boom.

Chief Investment Officer at Satrix* Kingsley Williams, offers compelling insights into the phenomenon.

Reason 1: Certainty in Investment Strategy

One of the primary driving forces behind the ETF boom is the desire for greater certainty in investment strategies. Traditional unit trusts often relied on discretionary management, which could introduce unpredictability into investors’ portfolios. In contrast, ETFs are rooted in rules-based or systematic strategies, typically linked to specific indices. This approach provides investors with unparalleled transparency and consistency, instilling confidence that a fund tracking an index will adhere steadfastly to its intended strategy.

Investors appreciate the assurance that an ETF’s rules-based approach offers. It ensures that the fund will unemotionally rebalance back to its stated objective, consistently delivering what’s on the label. This level of predictability is particularly appealing to investors who are designing or managing an overall solution to achieve a particular investment outcome.

Reason 2: Performance Benefits of Indexation

The second reason contributing to the ETF boom revolves around the performance benefits of indexation versus actively managed funds. The arithmetic of active management often leads to underperformance of a majority of active funds relative to an indexed alternative, due to various factors, including higher fees, market volatility, and human biases. In contrast, index-based strategies present a compelling proposition by delivering reliable returns over the medium to long term.

This is a critical advantage that ETFs offer. By tracking well-constructed indices, these funds bypass the pitfalls of active management and enable investors to enjoy the full benefits of market growth without the drag of excessive fees and potential underperformance.

Reason 3: Drive for Lower-Cost Strategies

The cost of investing is a paramount consideration for investors, both individual and institutional. Herein lies another driver of the ETF boom: the pursuit of lower-cost investment strategies. ETFs, with their cost-effective structure, have emerged as an attractive choice for investors looking to maximise their returns.

The magic of compounding, often referred to as the eighth wonder of the world, is amplified when investors minimise the tyranny of compounded costs over an extended period. ETFs facilitate this cost-efficiency, allowing investors to accumulate wealth with greater efficiency.

Reason 4: Protection from Transaction Costs

One of the distinctive design features of ETFs is their ability to protect existing investors from the costs associated with other investors entering or exiting the fund. This mechanism, akin to the user pay principle, ensures that those transacting in the fund bear the associated costs, shielding long-term investors from negative impacts.

This unique characteristic provides peace of mind to investors, knowing that the actions of others entering or exiting the fund won’t disrupt their performance. It aligns the interests of all investors within the ETF, making it an ideal choice for those seeking stability and predictability.

Reason 5: Increased Investment Strategy Choices

ETFs have democratised investing by offering an extensive range of investment strategy choices. This democratisation is achieved through the ease of launching ETFs and the protection against transaction costs. These factors enable asset managers to introduce diverse strategies to the market, providing investors with more options to construct their portfolios.

Investors now have greater freedom to tailor their investment strategies to their precise needs, whether they seek exposure to specific sectors, asset classes, or themes. This enhanced flexibility has made ETFs a preferred instrument for constructing diversified portfolios.

Reason 6: Access to Diverse Asset Classes

Another compelling aspect of ETFs is their ability to make various asset classes accessible through the stock exchange mechanism. While traditional exchanges primarily catered to equities, ETFs have expanded the horizon by offering exposure to bonds, money market instruments, currencies, commodities, and more.

The beauty of this approach is that investors can interact with these diverse asset classes as easily as they would with equities. This added convenience has revolutionised access to traditionally opaque markets, bringing transparency and liquidity to asset classes that are challenging to navigate directly, and are often inaccessible to direct retail investors.

Reason 7: Unlocking Tax Benefits

In specific markets, ETFs unlock tax benefits that further enhance the returns they deliver to investors. While the intricacies of tax considerations may vary by jurisdiction, understanding these nuances can be vital for investors, especially when accessing global investment strategies.

For example, some ETF structures may provide more tax-efficient ways to access certain markets or assets compared to traditional unit trusts. These tax advantages make ETFs an attractive choice for investors keen on optimising their investment outcomes.

Reason 8: Growth Potential in South Africa

While the ETF boom has swept across the globe, individual markets are at different stages of adoption. In South Africa, for instance, the take-up of index strategies and ETFs is still in its relative infancy. However, promising signs suggest a bright future for ETFs in the region.

Currently, South Africa lags behind more mature markets like Europe and the United States in terms of ETF adoption. There is an approximately 15% ^[1] take-up across local equity indexed strategies so there is still a lot of runway in our market in terms of adoption. Predictions indicate that global ETF assets under management will continue to experience robust growth, with South Africa poised to play a part in this expansion.

Reason 9: Unlocking Untapped Markets in Africa

The influence of South African ETFs has extended beyond its borders. These ETFs have been cross-listed in various other African nations, including Namibia, Botswana, Ghana, Mauritius, Kenya, and Nigeria.

Many of these markets are dominated by cash-type investment strategies or bonds due to high-interest rates. Furthermore, investors in these regions often struggle to access global investment strategies due to regulatory hurdles.

This cross-listing approach has enabled South African ETFs to contribute to the broader African investment landscape. ETFs are bridging this gap by providing a convenient and cost-effective way to facilitate access to a broader range of asset classes and investment strategies. This democratisation of investment opportunities empowers individuals and institutions across the continent to diversify their portfolios and seek returns beyond their domestic markets.

The Broader Context

The global ETF boom is not a solitary phenomenon but part of a broader shift in how individuals perceive and approach investing. Only a few years ago, there was skepticism about this investment option, especially in markets like South Africa, where the investment landscape appeared distinct and challenging. Concerns were raised about the country’s resource-heavy stock market and its concentration relative to global counterparts.

However, as time has passed, real-world data and tangible results have begun to reshape investor perceptions. The emergence of ETFs with proven track records has made a compelling case for these investment vehicles. The numbers speak for themselves, as clients have increasingly compared the returns generated by ETFs to those from other investment options.

Financial education has played a pivotal role in this transformation. As investors become more aware of the array of options available to them, platforms like SatrixNOW have made it easier for individuals to explore ETFs and embark on their investment journey with confidence.

^[1] Source: Satrix & Morningstar across all (ASISA) SA Equity & Real Estate categories, 30 June 2023

*Satrix, a division of Sanlam Investment Management

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