ETPs offer investors a streamlined way to access a diversified portfolio of shares traded on stock exchanges like the Johannesburg Stock Exchange (JSE). These investment vehicles typically track an index, such as the FTSE/JSE Top 40, allowing investors to benefit from broad market exposure with the convenience of trading a single security. ETPs are renowned for their cost-effectiveness, making them an attractive option for both novice and seasoned investors.
Understanding the various aspects of ETPs can help you make informed investment decisions. From the types of ETPs available and their benefits to their cost efficiency, tradeability, transparency, and dividend payouts, ETPs provide a robust and flexible investment solution. Additionally, ETPs are well-regulated and offer clear ownership rights, ensuring a secure and transparent investment experience. Explore how ETPs can fit into your financial strategy and take advantage of their unique benefits today.
What are ETPs?
An Exchange Traded Product (ETP) is an investment vehicle which provides an investor with direct access to a basket of shares traded on stock exchanges such as the Johannesburg Stock Exchange (JSE) with the convenience of trading in a single security. Most ETPs track an index, such as the FTSE/JSE Top 40. ETPs are attractive as investments because of their low costs (Total Expense Ratio [TER]) and the ability to purchase them like a normal listed security. An ETF combines the diversified portfolio of a unit trust investment with the tradability features of a listed security allowing it to be bought or sold during each trading day at the market ruling price. ETPs are passive investments, i.e. they provide the average performance of the asset class or index being tracked and not active investments (which seek to outperform the index).
Types of ETPs
There are two types of ETPs traded on the JSE:
Exchange Traded Funds (ETFs)
Typically track a basket (or index) of shares. The shares that replicate the index are physically held in a Trust (under the control of an independent Trustee) and ETF investor purchases a participatory investment in this portfolio (fund), which trades as an ETF on the JSE. ETFs are typically registered as Collective Investment Schemes (the same as unit trusts) and are regulated by the Financial Sector Conduct Authority (FSCA) under the Collective Investment Schemes Act (CISCA).
Exchange Traded Notes (ETNs)
Typically provide access to assets that are less suitable to physically hold and store, such as commodities, currencies, etc. The issuer of the ETN is allowed to cover its liability to deliver performance through exposure to futures or forward contracts and does not have to hold such assets in physical form. The issuer of the ETN has the obligation to provide the total return (performance) of the asset being tracked. This obligation requires that the investor needs to take into account the creditworthiness (credit rating) of the issuer of the ETN. This is not necessary with an ETF.
How can ETPs benefit me?
Buying a basket of shares (an ETP) is less risky than buying a single listed company as the diversification and spread of investments reduces the risk exposure. ETPs typically track an index of the most liquid shares on the stockmarket. Indices are regularly rebalanced by the Johannesburg Stock Exchange (JSE) to ensure that they reflect the most successful securities on the exchange.
Are ETPs cost effective?
When you buy an ETP you only pay once for exposure to a basket of shares. If you bought this index basket yourself, via a stock broker, it would be more expensive, and you would pay brokerage and Securities Transaction Tax (STT) for each of the shares purchased. When you buy an ETP, you only pay brokerage once and there is no STT payable for ETP transactions. ETPs generally have lower costs than other investment products because most ETPs are not actively managed and the underlying portfolio of shares is not traded regularly. ETPs typically have lower marketing, distribution and administration expenses.
Are ETPs easily tradeable?
Yes, you can buy or sell ETPs at any time on the JSE just like any other listed security. The JSE trading system facilitates buying and selling prices at all times and there are market makers to provide liquidity (prices) for large orders. Alternatively, investors can transact ETPs via ETFSA.co.za where all orders are pooled and traded once a day.
Are ETPs transparent?
Being listed on the JSE means that prices are updated at frequent intervals and are available to investors throughout the trading day, and not just once a day like a unit trusts. The ETP issuer discloses the underlying portfolio of shares in the ETP fund on a daily basis.
Do ETPs pay dividends?
Yes, ETFs collect the dividends from all the companies in the index tracked and pay these dividends over to investors, normally four times a year at the end of each quarter. The accrued dividends in any ETF portfolio are published daily in the net asset value (NAV) figures by all ETF issuing companies. ETNs typically do not pay dividends.
What fees do I pay for ETPs?
ETFSA Investor Plan has a brokerage change of 0.08% of the amount invested for any ETF/ETN transaction executed on its platform. Stockbrokers have varying brokerage charges, depending on the size of the transaction and typically have minimum brokerage charges (from R50 to R120 per trade) which is incurred on each trade or leg of a trade. Online brokers typically charge between 0.4% to 0.08% per transaction. Full service stockbrokers charge 0.8% and upwards. Stockbrokers typically charge a custodian and administration fee which ranges from R50 per month up to R1000 per year. Buying ETPs direct from ETFSA Investor Plan incurs a maximum annual management charge of between 0.35% and 0.65% of the value of the investment. This includes administration, custodian charges and reporting to investors.
Do I have ownership of my ETPs?
Every ETP security you own is registered in your name on the JSE/STRATE electronic share registers by ETFSA Investor Scheme on a daily basis.
Are ETPs well regulated?
Nearly all ETF issuers are registered Collective Investment Schemes and are regulated and controlled by the Financial Sector Conduct Authority (FSCA). All ETPs are publicly listed securities and are also regulated by the JSE. ETNs are regulated by the JSE but are not Collective Investment Schemes.
