Principal Officers Association November 16 th 2010 Exchange Traded Funds (ETFs) Alex Johnstone Country Manager, South Africa
Agenda An Introduction to ETFs The Global Landscape The Local Landscape ETF Industry Trends ETF Benefits 2
Section I. An Introduction to ETFs 3
Your best bet is to opt for an index fund the type that uses your money to track a stock market index those index funds that are very low cost are investor-friendly by definition and are the best selection for people who wish to own equities. (Warren Buffet)
WHAT ARE ETF s? Exchange Traded Funds have a split personality Are like an ordinary mutual funds or collective investment schemes > Well regulated (e.g. locally JSE and FSB) > Passive, index tracking But trade and settle just like equities > Listed on a stock exchange > Bought and sold through brokers 5
ASSETS TYPES OF ETFS EQUITY INDEX (LOCAL AND INTL) FIXED INCOME INDEX STYLE/SECTOR INDEX COMMODITY PROPERTY CURRENCY
WHAT ARE ETF s? (continued) ETFs are tasked with delivering the performance of an entire basket of securities within one, easy-to-trade share Examples of baskets of shares or bonds (or indices) FTSE/JSE Top 40 Financial 15 Resources 20 South African Property Index GOVI; Government Inflation Linked Bond Index Intl FTSE 100, MSCI World, DJ Eurostoxx 50 Commodities Gold or Oil This means that you or I can buy an ETF on a stock exchange in just the way we would buy a share in Vodacom or Shoprite (or BNY Mellon!) but have that share represent the entire index. 7
INGREDIENTS... To make an ETF we need the usual mix from the funds world Fund Sponsor/Management Company Investment Manager Audit/Legal Fund Distributor/Distribution Network Administration Services Accounting, Custody, Trustee Transfer Agent plus a little help from the trading world Index Creator and Licensor Central Securities Depository/Common Depository Specialist and/or Market Makers (Authorised Participants) And of course an exchange to trade the products on.. 8
WHERE DID THEY COME FROM? In 1993, some bright spark in the US had the idea of packaging the entire S&P 500 within a single equity The SPDR (ticker SPY US) was born, structured as a collective investment scheme, SEC registered and holding each security in the S&P 500. Like all other collective funds, this one issued shares the difference was that these shares were (and still are..) listed for trading Today, that ETF is the largest in the world at $80 billion and still going strong 9
Section II. The Global Landscape 10
GLOBAL ETF s As at end of October, the global industry 2,409 ETFs (US 887, Europe 1,048) $1, 239 billion in asset value 130 providers 46 exchanges YTD asset growth of 19.6% 24% growth in number of ETFs 514 new 50 de-listed Average daily trading volume of $60bn Source: Blackrock, Bloomberg 11
GLOBAL ETF PROVIDERS 12
GLOBAL ETF PROVIDERS Blackrock/iShares largest global provider 466 ETFs $556bn AUM 45% market share State Street Global Advisors (SSgA) 113 ETFs $170bn AUM 14% market share Vanguard 64 ETFs $135bn AUM 11% market share These three providers have 70% of AUM Source: Blackrock, Bloomberg 13
GLOBAL ETF ASSET GROWTH
GLOBAL ETFS BY EXPOSURE TYPE
GLOBAL ETF LISTINGS
TOP 25 GLOBAL ETF PROVIDERS BY AUM
Section III. The Local Landscape 18
LOCAL ETF s First South African ETF listed in 2000 25 ETFs currently listed on JSE Total AUM approx $2bn (approx R14bn) Source: JSE, Blackrock 19
LOCAL ETF BREAKDOWN Source: JSE
LOCAL ETF PROVIDERS
PROVIDERS RANKED BY AUM
ETF PERFORMANCE TRACKING Example Satrix 40 versus FTSE/JSE Top 40 Source - JSE
Section IV. ETF Industry Trends 25
GENERAL TRENDS Recession: Trend towards passive products for performance and transparency New ETFs there are over 1,000 in planning stages.. 25 new providers 5 new exchanges Niche Markets: Move from tracking established equities indices (commodity, alternatives) 26
SOME RECENT DATA In October 2010, total new assets of $21bn Equities - $16.5bn Emerging Markets $9.7bn versus $6.8bn into Developed Fixed Income $3.3bn Size matters? 2,409 in total but top 100 account for 63.3% of AUM 1,217 have less than US$50m 426 ETFs have less than US$10m ETFs versus mutual funds Global net sales down $132bn (first 8 months of 2010) ETF sales up $84bn same period Source: Blackrock, Bloomberg, National Stock Exchange (NSX)
THE INSTITUTIONAL BUYER? Traditionally viewed as retail in US Now used by 14% of pension funds, endowments etc Represents roughly half of US invested value in ETFs Five key factors for selection Fees Liquidity Benchmark Track record Company reputation Trends 55% expect their usage to increase in next three years 20% expect usage to decrease Source: Blackrock, Greenwich Associates
GROWTH OF INSTITUTIONAL USERS
Section V. ETF Benefits 30
THE BEST OF BOTH WORLDS Because ETFs are like index tracking funds they are Easy to manage the manager need only do whatever the index does Easy to account for Well regulated Easily exportable to new markets Instant global access, buy or sell a basket of shares When ETFs trade and settle as equities they Provide an efficient alternative to other index-tracking instruments Continuously traded Price intraday DO NOT attract STT in SA 31
WHAT CAN THEY DO FOR YOU? Deliver long term performance For example, JSE has delivered more positive years than negative Reduce costs ETFs have lower TERs (running costs) than Unit Trusts (about one-third) > Approx 50bps for ETFs Impact of lower costs increases performance in medium to long term Reduce risk ETFs provide beta, the average return only 50% of investors can beat this! After trading expenses even fewer beat it Exposure diversification (basket) Provide holdings transparency Invest in the blue chip constituents of an index and monitor in real time Cash flow distributions (dividends)
ANY DOWNSIDES? This is passive management No potential to beat the market (alpha) Only getting the market exposure Therefore often makes a good compliment to active management, i.e. a core strategy that can be enhanced by satellite active mandates
ACTIVE VS PASSIVE But. Most active managers under perform the index SA Unit trust performance vs JSE/All Share benchmark 5 yrs 62% of all unit trusts underperformed 10 yrs 72% 20 yrs 78% Source: etfsa
ETFS VS FUNDS Best performing index trackers Past 5 yrs Satrix INDI 25 ETF, 18.71% p.a. Stanlib Index Unit Trust, 15.78% p.a. Past 3 yrs Satrix DIVI ETF, 11.91% p.a. Prudential Property Enhanced Unit Trust, 10.03% p.a. Source: etfsa
THE ADVANTAGES Tradability Live prices, open price discovery No STT Narrow spreads due to liquidity Have market makers, can be traded at any time Transparency Recordkeeping All purchases, sales, creations go through exchange Can be shorted Regulated Nearly all locally are registered as Collective Investment Schemes Securities held in trust Compliance and control via Management Company
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