Capturing value for clients from South Africa’s ETF boom

By Kingsley Williams, Chief Investment Officer at Satrix*

PwC’s recent report, ETFs 2026: The Next Big Leap, reveals that 58% of respondents expect global exchange-traded fund (ETF) assets under management (AUM) to reach US$18 trillion by 2026. Additionally, 84% anticipate that online platforms will become the primary source of future demand for ETFs. This global trend is mirrored in South Africa, where Satrix introduced the first ETF in 2000. Since then, these assets have seen significant inflows, making ETFs an increasingly popular investment option amid South Africa’s challenging economic conditions.

Current landscape and growth

The South African ETF industry has experienced impressive growth. As of December 2023, the total ETF industry AUM, including commodities, reached R147.9 billion, a growth of 25.4% from the previous year. Satrix, specifically, has seen its ETF AUM grow from R25.5 billion in December 2020 to R52.3 billion in December 2023, reflecting a compound annual growth rate (CAGR) of 27.1% per annum, compared to the industry growth rate of 13.2% per annum.

We are still seeing very healthy flows into ETFs midway into 2024, with nearly R4 billion of net flows into the range of ETFs available in South Africa, with Satrix receiving 40% of these flows. This robust activity, despite some product consolidation, underscores the ongoing appeal and resilience of ETFs.

Here’s why ETFs should be an attractive option for financial advisers to diversify client portfolios:

1. Greater certainty

ETFs employ rules-based or systematic strategies, offering clients greater transparency and consistency in their investment choices. These strategies rebalance back to their stated objectives, providing clients with the confidence that they will always get what’s on the label. This predictability builds greater investor confidence.

2. Compelling medium- to long-term performance

The arithmetic of active management suggests that, after accounting for higher fees and transaction costs, the average actively managed rand will underperform the average broad-market indexed rand. While an index fund might slightly underperform the market benchmark it tracks, its cost-effectiveness often leads to significantly better-than-median returns over the medium to long term. The lower costs associated with index-based ETFs can significantly improve overall investment outcomes through the consistent compounding of lower fees.

3. Unique cost structure

ETFs are designed to protect existing investors from the costs generated by others entering or exiting the fund, unlike Unit Trusts. This design feature shields long-term investors from external churn, safeguarding their performance and ensuring a fairer cost structure.

4. Extensive investment choices

ETFs offer a broader range of investment strategies compared to index fund Unit Trusts, which enables advisers to construct more tailored portfolios for clients. They facilitate access to diverse asset classes through the stock exchange mechanism. This provides a transparent and liquid way to gain exposure to traditionally more opaque and complex asset classes, such as bonds, currency, or commodities.

5. The changing tide

Five to ten years ago, there was considerable scepticism regarding the adoption of ETFs in South Africa due to the unique characteristics of our market. However, with over two decades of index history now available for analysis, ETFs have proven their worth. We’ve also seen robust growth in the take-up of ETFs, since being made available on Linked Investment Service Provider (LISP) platforms. The last three years to June 2024 saw AUM grow almost five-fold, from just over R1 billion to over R5 billion. The arithmetic of active management is becoming more evident to advisers and investors, further boosting the case for ETFs.

6. ETFs for risk mitigation and diversification

In volatile markets, ETFs provide significant benefits for risk mitigation through diversification. The increased range of investment strategy choices across different asset classes or even multi-asset class (balanced) ETFs allows advisers to construct well-diversified portfolios for clients, that capture their desired themes. For example, advisers can employ a low volatility local equity strategy through the Satrix Low Volatility ETF or gain high rand-hedge exposure for clients via the Satrix JSE Global Equity ETF. Defensive options include interest-bearing ETFs like the Satrix SA Bond ETF and Satrix Global Aggregate Bond ETF.

7. Offshore and local exposure

ETFs offer both offshore and local exposure. For example, the Satrix MSCI ACWI ETF tracks the MSCI All Country World Index, providing exposure to over 2 800 companies across 23 developed and 24 emerging markets. Other options include thematic strategies like the Satrix Nasdaq 100 ETF for technological innovation and the Satrix MSCI World ESG Enhanced Feeder ETF for climate transition and ESG investing.

The ETF boom in South Africa is multi-faceted, driven by cost efficiency, performance, and accessibility. As advisers, understanding these drivers will better help you guide your clients and offer a broader palette of effective investment strategies.

*Satrix is a division of Sanlam Investment Management.

Disclaimer