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SIMON BROWN: I’m chatting now with Nerina Visser, director at etfSA. Nerina, I appreciate the early morning. Partial delistings of ETFs – we see them. I’m looking for example, at the Satrix Resi one. It happens with many – all these Sens announcements saying, ‘partial delisting’. Every time it happens there’s a sort of flurry of folks saying, ‘Oh, they are cancelling my ETF!’ What is the story with the partial delisting? I suspect we might have to go back to how we create the ETF units.
NERINA VISSER: [Chuckling] Good morning, Simon, good morning to all the listeners. Yes, I think it’s very important to remember that ETFs are first and foremost also collective investment schemes, so unit trusts in local terms. These are open-ended funds, which means that they can increase in size and they can decrease in size. So when you see a notice of a partial delisting, it really just means that some units have been cancelled and the underlying assets have been sold to make up for the partial delisting, to pay out investors. But more often than ‘partials’, we actually see new listings of units – to the tune of during 2023 on the JSE we saw R10 billion of net new assets being created within the exchange-traded product universe on the JSE.
So, yes. Nothing to be concerned about when we see a Sens announcement about a partial delisting. It’s evidence of a very well-functioning market.
Very important. Having an open-ended fund means that the ETF trades at its net asset value. If you had a closed fund, you would have a situation where there might be excess demand for units, in which case they start trading at a premium, there might be excess supply, and then they start trading at a discount. So the fact that they are able to create and redeem on the fly is what makes them trade at their net asset value, and it means that you, the investor, are always buying those ETF units at their fair value, at the true value of the underlying. So a great evidence of a well-functioning market.
SIMON BROWN: I take your point on that. It does mean that, and the ability to buy at net asset value is hugely important. It means I don’t overpay. And of course the net asset value is easy to determine because there’s an underlying basket of shares. We can debate the value of the shares, but they have a price, and that’s what then flows into the ETF price.
NERINA VISSER: Exactly, exactly. So your basket of shares’ fair value in the sense is really just the value of the shares in the underlying basket. So yes, you and I can debate whether that is too expensive or not expensive enough, but the point is that that reflects what the current market value is of those underlying shares or assets within the basket. That is the fair value that the market attributes to it at any point in time.
SIMON BROWN: In essence, that partial delisting is just saying that in the immediate term there’s less investor appetite, and again – I’m looking at the Resi one – I could have picked any one of 100 ETFs. Right now investors are just saying, ‘I don’t want so much Resi anymore’, and selling back to the market maker. It’s short term with less interest. It almost, I‘d say, doesn’t matter.
NERINA VISSER: Exactly. And yes, you’re quite right. Over time one could look at these trends in terms of net sort of increases in shares in issue versus net decreases. It does give you some sort of indication in terms of where the appetite for the market is. So, as you say, you sort of chose the Resi now. I don’t think it takes rocket science to appreciate that with commodity prices where they are, with the mining industry where it finds itself, there’s just not as much demand for these types of investments at the moment.
But if you turn your attention to maybe the high tech, the Fangs – Facebook (Meta), Amazon, Netflix, and Google (Alphabet) – the AI, these sort of ones, you’ll see net increases in shares in issue because that’s where the demand is. So it is an interesting exercise over time to monitor these. But I would also caution reading too much into that, to assume that just because there is some partial delisting there’s some negative sort of perspective on that – not necessarily. You don’t always know why existing investors are selling out and what they’re buying in the place of it.
SIMON BROWN: Or where they bought. It might just be somebody in, I don’t know, Potchefstroom who has a big weekend planned and needs some cashflow. [Chuckling]
NERINA VISSER: Yes. I was just going to say exactly that. At this time of the year we often find that people are doing trading for tax year-end purposes – for example, wanting to make contributions to their retirement annuities or to their tax-reinvestment accounts, or whatever the case might be. So don’t presume that what you see in terms of market activity means what you think it means. It’s much like when management sells shares in the company. That’s not always a reflection of them being negative on the outlook for the company, but rather their just doing some risk management perhaps in their own personal share portfolio.
SIMON BROWN: Hundred percent. And you make the point then, of course, it’s February, which means we are 10 days – because there’s an extra day this year – away from the tax year-end for individuals.
You said before on the show that if you haven’t maxed out your tax-free or your Regulation 28 limit so far and you’ve some discretionary ETFs, it might be worth selling those to put them into the tax-free limits – R36 000 for tax-free, and R350 000 or 27.5%.
NERINA VISSER: Absolutely, Simon. You’re so right. Often people think about these things, but what if the market is currently at a high or at a low, or whatever it might be? But if you’re moving from an existing investment that is just in a discretionary or a voluntary investment account where you don’t have any tax benefits, moving money from that type of investment to your tax-free or to your retirement annuity does offer some tax benefits.
This is just great doing it, because It really doesn’t matter at what level the market finds itself. You are moving from one investment to another investment in whatever the prevailing market conditions are, but you are doing so into a more tax-efficient vehicle.
Of course, you should be doing this in terms of your tax-free [option] right at the start of the tax year. So if you haven’t done it yet for the current tax year ending on February 29, please do so. But remember, as soon as March 1 rolls around, you can do your next tax year’s contribution.
We usually recommend do your tax-free investment contributions as early as possible in the tax year so that you enjoy four quarters or 12 months’ worth of tax-free interest, tax-free dividends, and tax-free capital growth.
You can wait to do your retirement contributions later in the year because it doesn’t matter when you do it, you get exactly the same tax benefit. So [that’s] a sort of a timing, maybe, consideration for people in terms of thinking about how to best optimise their tax opportunities in investments.
SIMON BROWN: Gotcha. We’ll leave it there. Nerina Visser, director at etfSA, I appreciate the early morning.
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