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SIMON BROWN: I’m chatting with Nerina Visser. She is of course of etfSA. Nerina, I appreciate the time today. Looking back at the year of ETFs, I’ve got to say I’ve been a passive fan forever and a day, but this was an astounding year.
NERINA VISSER: [Laughs]
SIMON BROWN: I think ETFs have been doing more than 20%, probably close on 30%. The winner on the JSE is the 1nvest S&P 500, Infotech 72%, Satrix, Nasdaq, 66%. These are crazy numbers.
NERINA VISSER: Well, base effects would help. They do help. But yes, even with low base effects, these are still spectacular numbers because we did see those ones that you mentioned already start rallying towards the end of last year. So it certainly wasn’t just base effects.
But, Simon, I’m a bit of a stats nerd. I had a look at the number of exchange-traded products that closed up for the year and the number that are down. And exactly 80% of all the exchange-traded products actually closed in the green, and only 20% of them, 35 in total, had negative returns. So that is quite spectacular. The market increased by about 23% in terms of the market cap or the AUM [assets under management] in all these products. A big part of that was price, with sort of an aggregate price increase of around about 17%; but about 6% new issues also. So brand new products, but also additional issuances by existing ETFs and other exchange-traded products as well. So yes, you’re right. A spectacular year indeed.
SIMON BROWN: And some oddities. That 80% green, particularly when it doesn’t feel like a year that was very green if you were outside, is magnificent. But we had Japan, we had Europe, we had India. Even the sort of more niche ETFs have really come to the party and done what they say on the sticker.
NERINA VISSER: Yes, indeed. But I think maybe part of the reason why for many people it doesn’t feel like the market has been so up is, if you sort of split these between global exposure and local exposure, our local ETFs certainly did not do particularly well. The flagship Satrix 40 is up 1%. So that gives you some sort of idea compared to some of those – like the S&P 500, 35%. And yes, the rand does play some role in that, but certainly the local market has not performed as strongly as the global – especially the developed markets in the US in particular – have fared. But the Satrix Indi has been probably the best of the bigger local ones. The Fini also did quite well.
The theme for me in the bad performers was very much mining and certain commodity related. So we see things like the Satrix Resi, the Divi Plus, the Shari’ah 40 – these things are all ETFs that have a very high mining company exposure, and they were all solidly in the red for the year.
SIMON BROWN: I noticed you politely skipped the rhodium ETF – down over 60%. But if you take single commodity, you take your chances. The one that surprised me, but then of course it doesn’t, is the Satrix Divi which is down a little in the year. But of course that’s Thungela, that’s Implats and that’s …; it’s forward dividend yield. That’s how you get it, and then the price can fall.
NERINA VISSER: Yes. When we look at the way that that index is constructed, it very much focuses on forecasted or forward dividend yields. So when the analysts are not that quick to update their forecast, [for] certainly the likes of Thungela and even Kumba, Exxaro and so on, the challenges around exports, the inability to get the raw material out through the ports – that hurt our mining industry overall. And then you see it specifically in these sorts of ETFs that have a disproportionate exposure to these mining companies.
SIMON BROWN: And that comes back to one of the key lessons with the ETFs, which is to know how they are built. I think a lot of folks think divvy and they think high dividend. It’s a methodology knowing what’s inside, and the process is important.
NERINA VISSER: Absolutely. I often encourage people that that’s really what you need to do when you want to do a due diligence on an ETF, because this is not about a fund manager or a portfolio manager, or to a large extent even the issuer. Yes, the issuer does play a role to some extent, but it’s mostly the index that you are buying into. So that’s really where you want to spend most of your assessment, your analysis. Look at how that index is constructed. The two main things that I focus on are what are the selection criteria for the stocks in that index, and the basis on which they are chosen? The likes of the Top 40, well, the 40 largest companies by market cap on the JSE – easy. Divi Plus? Well, the 30 out of the top 100 that have the highest forward dividend yield – a very different group of companies from the Top 40.
But the second aspect is how these stocks are weighted in that index. Again, the example of sort of your vanilla [stocks], the likes of a Top 40 or whatever are market-cap weighted. So the biggest companies have the biggest weights. And of course we see that in the S&P 500 with its Magnificent Seven. And you see it in the Nasdaq and so on.
But when you then look at some things [that are] a little more unusual, like the Divi Plus, the weights of those companies are also determined by their dividend yield. So when it works well, it works really well in your favour. When it doesn’t work so well, as in this past year, then you really do get hammered almost like a double-whammy.
SIMON BROWN: Absolutely. I take your point on that. You mentioned all assets under management are up 23%. What is the size of the ETF market these days?
NERINA VISSER: We’re looking at R165 billion as we stand now. And I can tell you that that is represented by 214 exchange-traded products. Yes, we do now have more exchange-traded products than companies that you can feasibly invest in on the JSE. I use the term, you’ll hear, ‘exchange-traded products’ because ETFs are obviously a very important part of those – almost a hundred of those 214 are ETFs. But then we also have ETNs, exchange-traded notes, which are typically, call them, promissory notes issued by a bank that says, we promise to pay you the performance of the reference asset. You don’t own the asset as the investor.
I love using gold as an example. If you buy a gold ETF, you actually have ownership of the gold in that ETF. When you buy a gold ETN, you get the performance of the gold price, but you don’t actually own the gold. And so ETNs are great. They allow us to get access to investments that might not otherwise be easily accessible. Think of things like your agricultural commodities or energy commodities – oil, coal, those sorts of things. But then also things like currencies.
We had a conversation this morning here at the office about the exorbitant fees that are paid for forex, foreign exchange, probably one of the most expensive financial services products. You can buy an Absa New USD, which is effectively the rand/dollar exchange-traded note. The price of that in rand is just the rand/dollar exchange rate. So if the rand weakens, the price goes up. If the rand strengthens, the price goes down. And so it’s a very clean and neat one.
But then clearly the story of 2023 has been the rise of active in the ETP space. For many people this still feels like a bit of a contradiction: ‘How can you have actively managed ETFs? I thought all ETFs were index-tracking products.’ But no, they are certainly a very strongly growing part of the global ETF industry, and we now in South Africa also have a number of these actively managed ETFs. The underlying is also a CIS [Collective Investment Scheme], so it’s a unit trust, but it’s actively managed. And then we’ve got a large number of AMCs [actively managed certificates]. They are very much like the ETNs that we spoke about, but your underlying reference portfolio is an actively managed portfolio, overseen by a specialist portfolio manager that manages those assets on your behalf.
SIMON BROWN: And what we are seeing here is some really great products. Keith McLachlan has an offshore small cap. Andy Pfaff has got that commodity one. They might not be in … accounts yet, but they really are giving an investor on the JSE a great range and ease of purchase.
NERINA VISSER: Absolutely. I really want to encourage investors to go and have a look at some of the underlying investments in this space because we have products, for example, which invest in American companies – US equities – but they’ve picked them on the basis of high dividends and high share buybacks. So here you are dealing with companies that return a lot to shareholders, through both dividends and share buybacks. That’s a particular active strategy, and you can buy that as an AMC.
There are other products that allow you to invest in liquid private credit. In the US your regional banking crisis resulted in a lot of companies not being able to go to their traditional banks to raise capital, and so there are these private credit companies that lend money to these corporates, and you can now have a whole basket of investments into these liquid private credit companies. So there’s such an interesting range that’s out there – and if people are a bit of a nerd like I am, maybe you want to spend some of your December holiday having a closer look at some of these more unusual products.
SIMON BROWN: There are some absolutely excellent ones coming in.
The other big story in the ETP space was the acquisition of CoreShares by 10X. Now the products haven’t disappeared, they’ve all just been rebranded as 10X. But it was a big deal. It makes perfect sense for 10X, of course.
NERINA VISSER: Absolutely. And in fact they were one of the most proficient new ETF issuers, with five new ETFs that came from the 10X stable in this year alone. The other one that we also saw, and I call it ‘the new kid on the block’ because Prescient is now also an ETF issuer and they’ve also issued five ETFs, one of them being an actively managed product.
So yes, the 10X transaction, I agree with you, makes perfect sense in terms of the client base, the reach and what can be achieved with that. We see quite a bit of that in the in the interest-bearing or the bond space, but they also have some really interesting equity products. They have, for example, a Top 20 domestic equity ETF, and then they have the Next40. So it’s a little bit like the mid-cap, except that it’s just shares number 21 to 60 that you get. And [they are] equally weighted.
So, there are so many different ways in which one can now slice and dice this ETF universe, but also the JSE, and then obviously there is the incredible access that you get to global investments via these exchange-traded products.
I always say this is like me buying my favourite Belgian chocolate at my local Spar. It’s still the same Belgian chocolate that I get, but I’ve got the convenience and the ease of transaction of doing it in my local shop that I know very well. And I think that’s certainly what global ETFs have brought to the table for ETF investors.
SIMON BROWN: And of course Gareth Stobie, who was CoreShares, has now moved across to etfSA and is working with you and Mike Brown.
We’ll leave it there. Nina Visser at etfSA, I always appreciate the insights.
