Passive funds 101: cost effective and transparent

South Africans wishing to participate in the Johannesburg Stock Exchange (JSE) for investment purposes can do so easily and cost effectively via two main types of ‘passive’ investment funds – unit trusts or exchange-traded funds (ETF).

Helena Conradie, chief investment officer of SATRIX says, “Passive investing makes owning a piece of the stock market as simple as possible.” She believes that ETFs and passive unit trusts are ideal for achieving savings and investment goals.

SATRIX, wholly owned by Sanlam Investments (SI), is a leader in the market for passive investment products. Its ETFs were introduced in 1999 and proved so popular with investors that SATRIX also decided to launch a range of passive unit trusts. Today SATRIX has more than R35bn of retail and institutional investor capital under management across these products.

What is a passive investment? “It can best be described as a product which mirrors the performance of a specified section of the stock exchange,” says Conradie. “Index trackers and passive unit trusts share exactly in the performance of shares in a certain index.”

The JSE All Share (Alsi) 40 index, for example, is a pre-defined combination of the 40 largest locally-listed firms as stipulated by the JSE each quarter. Other popular indexes include the JSE Resource index (Resi), Industrial index (Indi) and Financial Index (Fini).

How do investors decide whether a unit trust or ETF is the better route to go? “How an individual investor chooses to incorporate passive investments into their overall financial plan differs significantly from one person to the next,” says Conradie. “Whether they purchase a unit trust or an ETF from SATRIX depends entirely on their specific requirements.”

ETFs are popular among sophisticated investors who like the fact that they trade like shares and offer immediate exposure to the index. They typically purchase ETFs through a stockbroker as part of their share portfolios. The product can also be purchased directly from SATRIX (through the SATRIX Investment Plan) or on platforms such as ETF SA.

Investors can purchase unit trusts directly from an asset manager, on a LISP platform (as part of their retirement annuity investment) or via their financial advisers. Unit trusts are popular with retail investors due to the ease of access and substantial regulatory protections built into the collective investment environment.

“It is important to view passive investments as part of an overall investment portfolio,” concludes Conradie. “Investors should engage the services of a competent financial adviser to match their portfolio to their unique situation – our products are yet another tool that advisers can use to structure a sensible solution for investors.”

 SATRIX ETFSATRIX Unit Trust
Where to buyYou can purchase ETFs through a Satrix Investment PlanYou can purchase Unit Trusts via the Manco (Satrix Managers (Pty) Ltd); other fund managers; LISPs (in a retirement annuity) and some banks
You can purchase ETFs through your stockbroker
Minimum InvestmentLump sum: R 1,000, orEash LISP defines its own minimum requiment
Monthly: R 300/monthDirectly from the Manco with the following minimums:
Lump sum: R 10,000, or
Monthly: R 500/month
Key BenefitsETFs are listed on the stock exchange so you can buy and sell them like ordinary sharesUnit trusts are easy to access with multiple funds available from most providers
ETFs offer intra-day liquidity - there is always a price at which you can tradeUnit trusts are a popular and trusted investment vehicle, strictly regulated by the Registrar of Collective Investment Schemes and Financial Services Board
ETFs give you immediate exposure to an underlying index
Why purchase the productInvestors use ETFs to gain exposure to an index through a single cost-effective transactionA passive unit trust is an ideal savings product for individualsthat wish to put away lump sum or regular monthly amounts
Investors can use ETFs to take short-term positions in a particular sector of the stock market or a commodity (such as gold or platinum)A passive unit trust is ideal for investors who wish to hold long-term exposure to an index
TERThe TER for SATRIX 40 ETF is 45 basis points (0.40%) excluding VATThe TER for Satrix Index unit trust is 51 basis points (0.45%) excluding VAT
Other Costs (costs vary depending on how you purchase the product)You will incur standard brokerage fees when purchasing or selling ETFs through your stockbrokerInitial advice fee maximum of 3.42% (adviser dependent)
You will incur a brokerage fee of 0.1% when purchasing or selling ETFs on the SATRIXInitial manager fee of 2.28%, if applicable
Annaul advice fee maximum of 1.14% (adviser dependent)
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