For someone with R500 to R2,000 available to invest each month, choosing the right investment option is a daunting task and a big commitment. Exchange-traded funds (ETFs), a very popular investment option in today’s world, could simplify the decision-making process. These funds are *passive investment funds that simply track the performance of a list of underlying assets (referred to as an index). In South Africa we have 77 ETFs to choose from, some of which track the same set of assets, but that are just managed by different investment houses.
The following guidelines can help you find the right ETF for you.
Know your provider
Competition in the ETF space has driven fees down, making it one of the more affordable investment options. However, rather than only trying to identify the cheapest provider, you should also evaluate the ETF manager’s ability to track a specific index accurately. In other words, if you invest in an ETF that tracks the 40 largest shares in SA, your investment return must be close to the average performance of these shares.
Start by choosing an experienced provider with a proven track record and reading through their ETF factsheets (we know, these seem daunting at first) before you make your decision.
Diversifying your ETF portfolio
Next, you’ll need to decide what you want to invest in. You’ll have the choice to invest in the South African market and/or offshore. As with all investment strategies, your aim should be to diversify your risk and not have all your eggs in one basket. Although you can gain exposure to various industries by investing in a single ETF, it would also be wise to strongly consider a split between South African exposure such as a Top 40 ETF, and an ETF that tracks an offshore index like the S&P 500.
Your investment plan will also depend on how much you’re able to invest on a monthly basis. To avoid paying additional management fees, try to allocate your funds to a maximum of three or four different ETFs. By investing in too many different ETFs, you can end up investing in the same type of fund, while paying multiple management fees. Rather focus on asset diversification in those three or four ETFs by getting exposure to local equities, offshore equities, bonds and property.
Once you’ve done all the above, it’s now time to start investing through any of the various platforms. There are many user-friendly, low-cost platforms with a required contribution fee starting as low as R250.
*Passive investment funds: A passive fund is an investment vehicle that tracks a market index, or a specific market segment, to determine what to invest in.