How ETFs Are Transforming Investment Accessibility

https://iframe.iono.fm/e/1603729?layout=modern” width=”100%” height=”170″ frameborder=”0

You can also tune in to this podcast on iono.fm here.

SIMON BROWN: I’m speaking with Ben Meyer from Prescient Fund Services. Thank you for joining me, Ben. Your first ETF Evolution Report has just been published, coinciding perfectly with the 25th anniversary of South Africa’s first ETF launched by Satrix. You were at the JSE during that time and had a role with Satrix since the JSE was one of its early shareholders.

BEN MEYER: Thanks for having me, Simon. You are indeed correct. I was part of the team that structured Satrix, representing the JSE in that partnership. At the time, it was known as Capital Bank JSE and Genset Bank, the first participants involved with Satrix.

Discussions with investment managers across various regions indicate that the ETF market is expanding significantly. It’s growing rapidly in Europe, and we are seeing comparable growth here in South Africa. However, there is still a significant knowledge gap regarding ETFs and the opportunities they offer.

This is precisely why we developed that report—to empower success in global investing. We prioritize education in our mission, aiming to enlighten the market about ETFs rather than simply marketing products.

Listen: Reduced ETF fees return R20m to investors

SIMON BROWN: Indeed, the market has grown. We now have approximately 92 ETFs, including 29 actively managed ones. Additionally, there are AMCs [Actively Managed Certificates] trading on the JSE. However, in comparison to European and US markets, South Africa’s ETF market appears relatively small—possibly around R250 billion. This is limited compared to other collective investment schemes and unit trusts.

BEN MEYER: You are absolutely right, Simon. In Europe, mutual funds typically make up 50-60% of the assets in ETFs. In South Africa, the unit trust industry is approximately R1.7 trillion, while ETPs amount to around R250 million, including AMCs. Excluding AMCs, the ETF market represents about R200 million, with a large part attributed to gold and commodity ETFs.

If focusing solely on equity ETFs, encompassing both local and foreign options, the value is around R160 billion. Clearly, there are vast opportunities for growth.

Listen: The rise of ETFs and the risks of passive investing

You mentioned actively managed ETFs, which I believe will play a key role in fostering market growth—not merely by shifting assets from index tracking to actively managed ETFs, but by increasing awareness about ETFs.

Remember, 25 years ago, discussions centered around indexation and ‘passive investing’ dominated the industry, with active investors viewed as opponents.

SIMON BROWN: Exactly.

BEN MEYER: Indeed, the active versus passive debate has become less relevant over the past 25 years. Now, there are numerous indices, and ETFs track various indices and themes globally.

The conversation isn’t exclusively about active versus passive any longer; in Europe, the focus has shifted towards the benefits of ETFs as an investment wrapper, independent of the investment strategy employed.

Read: The ETF Revolution (Part 1): How passive investing is reshaping the rules

SIMON BROWN: Indeed, it isn’t. Active ETFs have been available for about three years, with examples like Coronation, which has seven active ETFs.

As you mentioned, it’s less about the active versus passive debate—ETFs are simply a product. Their ‘exchange-traded’ characteristic provides issuers with distinctive distribution advantages.

BEN MEYER: Absolutely. The exchange-traded model offers a different distribution method. While many may not trade intraday, the option to do so improves accessibility through various platforms.

In South Africa, there are numerous platforms like EasyEquities, ETFSA, and Vault, which enable broad access to investments via mobile devices. Gaining entry into public markets is far easier than in private markets, where onboarding through a Linked Investment Service Provider (LISP) is necessary.

Listen: Blending active, passive, and alternatives for smarter investing

In public markets, having investment access via an app unlocks new distribution opportunities. Educating the market on this is vital, as we are still in nascent stages both locally and in Europe regarding access to public-market instruments.

As you noted, ETFs are not merely a product—they function as a unique wrapper for investment strategies, offering a different conduit for market access.

SIMON BROWN: I completely agree. One major impact of ETFs has been their effect on costs. Twenty-five years ago, expenses for collective investment schemes and unit trusts were significantly higher. Now, ETFs can have fees as low as 10 basis points, rendering fees nearly insignificant. While they aren’t irrelevant, this has markedly shifted the pricing landscape—not just in the ETF sector but also in unit trusts and somewhat in hedge funds.

BEN MEYER: You’re absolutely right. Typically, index-tracking fees will be lower than those for actively managed funds due to fewer professional fees involved.

Moreover, ETF fees generally tend to be reduced given their public nature, resulting in more transparency regarding costs. A critical point often overlooked is that in the ETF sector, there exists only one fee class, unlike the unit trust space, which has institutional and retail fee classes.

Investment managers utilizing the ETF wrapper for distribution must be cautious with their pricing strategy since there’s only a single price point available, generally leading to lower fees compared to traditional unit trusts.

Read:
How much risk are you taking when choosing an active manager?
It doesn’t matter if you go active or passive

I’d like to elaborate on fees. It’s essential to analyze total costs to the investor rather than merely focusing on the fee itself, as fees can often be misinterpreted. If you access an ETF through an expensive platform, this needs to be included in your overall cost—not just the product fee. Consider also trading costs and spreads in the secondary market.

Furthermore, potential risk factors in the ETF sphere also deserve attention.

ETFs, as a wrapper, can facilitate risk mitigation more effectively than private market products since they trade intraday.

For example, during the market fluctuations instigated by the Trump tariffs in April, the ability to trade ETFs allowed for swift entries and exits, whereas private market products like unit trusts execute trades the following day, potentially forgoing advantageous price movements. This distinction highlights the risk factor.

Globally, there was a notable surge in ETF trading activity during that timeframe for this reason.

SIMON BROWN: That’s a vital point. The total cost, especially spread, is crucial since unit trusts transact at NAV, but ETFs function with market makers on both ends.

We’ll conclude here. Thank you, Ben Meyer from Prescient Fund Services, for your insights.

Listen to the complete MoneywebNOW podcast every weekday morning here.