ABSA CAPITAL EXPLAINS THE NEED FOR INVESTORS TO INVEST IN NEW GOLD ETF
BY PETER EGWUATU
ABSA Capital is the originator of New Gold Exchange Traded Fund (ETF) that was in the last quarter of 2011 listed on the Nigerian Stock Exchange (NSE). The NewGold ETF is one of the simplest and most cost-efficient methods for investors to invest directly in physical gold.
ETF are effective hedging tools for managing risk. For example, investors can guard against over concentrated equity positions by using ETFs as single stock substitutes. This hedging technique can reduce risk and volatility by letting stockholders diversify away from large equity positions of the companies they own or work at.
When institutional investors change asset managers, one of their over-riding concerns is preserving the ability to maintain equity exposure while the transition occurs. One way to achieve this goal is to liquidate the portfolio while simultaneously buying ETFs. Once the assets are transitioned, the new manager can redeem the ETF shares to pay for their share purchases.
Vetiva Capital was the sponsoring broker of New Gold ETF on the NSE when it was listed on the 19th of December 2011. Since the listing of New Gold ETF on the Exchange, its price has soared by 0.07 per cent or N181.00 from N2,526.00 to close last Friday at N2707.00.
Investigation reveals that many Nigerian investors know little or nothing about ETF, and therefore have not been able to take advantage of the new security.
What Exchange Traded Fund stands for?
An Exchange Traded Fund (or ETF) is an investment vehicle traded on a stock exchange, much like shares.
Most ETFs are passively managed index funds which normally track an index, with their main objective being to participate in the economic growth of an industry, sector or commodity. ETFs provide the attraction of the returns of a traditional tracker fund (like unit trusts) with the liquidity of a listed security. ETFs are traded at prevailing market prices, which are approximately the same price as the Net Asset Value (NAV) of their underlying assets over the course of the trading day.
Individual investors should view ETFs as core, long-term investments.
Why invest in ETFs as an alternative to other similar investments?
Low Cost - Because ETFs are designed to closely track the performance of their respective benchmarks, they have less frequent portfolio changes than actively managed funds, making them less expensive to operate. Additionally, because subscriptions and redemptions occur 'in-specie', there are fewer internal costs associated with operating ETFs, resulting in the overall lower costs associated with ETFs.
Tradability - ETFs provide investors with the ability to gain exposure to a broad market in one transaction as they trade on a stock exchange throughout the trading day. Investors buy and sell ETFs like shares, typically through a stock broking account or through an accredited financial services provider by means of an investment plan.
With unit trust investments managed by active fund managers, investors are not aware at what prices their securities are bought or sold. Most actively managed funds are bought and sold at the closing day's NAV and all buy and sell transactions are conducted directly with the fund company. In contrast, ETFs are bought and sold on a stock exchange throughout the day based upon market prices, which fluctuate according to supply and demand.
Why ETF is important
Transparent - Actively managed funds report their holdings on a quarterly or less frequent basis whereas ETFs disclose their portfolio holdings on a daily basis. The ETF performance and portfolio composition are a reflection of the underlying index as the holdings of an ETF closely mirror the underlying index it tracks as a benchmark. This provides ETF investors with a greater degree of financial transparency.
Diversified investment - ETFs give investors a straightforward and inexpensive way to obtain a broad exposure to a given index, sector, country or commodity compared to the purchase of several individual company shares.
Meanwhile, New Gold ETF have other advantages which include:
- providing a diversified exposure through buying a single share
- offering a market related performance or return
- Straightforward access to the performance of key indices and sectors
- A cost effective way of trading a basket of shares through a single transaction
- Automatic portfolio rebalancing of the constituent holdings of the respective index
- The flexibility to buy and sell the ETF securities during JSE trading hours
- A convenient method to invest and realise returns on investment
- The convenience of calculating the value of the ETF investment at any time
- Provide an opportunity for individuals and smaller institutions to track a market
What are disadvantages of ETFs?
ETFs operate on the principle that in the medium to long term, tracking specific markets, indices or commodities offer better 'after-cost' returns than unit trusts that trade through active fund managers. The ETF investor therefore does not trade to 'beat the market', but banks on returns from the consistency of 'being the market'.
What are the risks associated with ETFs?
- Investment in ETFs involve numerous risks including, general market risks, interest rate risks, exchange rate risks, inflationary risks, liquidity risks and legal and regulatory risks.
- The value of an investment in an ETF may increase as well as decrease as the market changes.
- ETFs are not capital protected and therefore investors may not get back the amount invested.
How can investors profit from ETF?
As with any other security, investors usually buy and sell their ETFs through the securities exchange. Profits (or losses) are made from the difference between the buying and selling prices. Like any other security, ETFs do however carry the risk of losing rather than gaining money.
Individual investors should view ETFs as core, long-term investments designed to reduce the price fluctuations that generally characterise arbitrary buying and selling of securities.
What are the investment strategies that can be used by investors with ETFs?
Asset Allocation - Managing asset allocation could be difficult for individual investors given the costs and assets required to achieve proper levels of diversification. ETFs provide investors with exposure to broad segments of the equity markets to conveniently, efficiently and affordably allocate their assets.
Cash Management - Investors typically seek exposure to equity markets, but often need time to make investment decisions. ETFs provide a 'parking place' for cash that is designated for equity investment. Because ETFs are liquid, investors can participate in the market while deciding where to invest their money for equity investments.