South Africa's Best Etfs: Where To Invest?

Exchange-traded funds (ETFs) are passively managed investment funds that track the performance of a basket of pre-determined assets. They are traded the same way as shares, but the main difference is that while one share gives exposure to one company, an ETF gives exposure to numerous companies in a single transaction. ETFs can be traded through a broker in the same way as shares, for example, on the EasyEquities platform. They are also eligible for tax-free savings accounts. When it comes to investing in South Africa, the easiest way to invest in the whole South African stock market is to invest in a broad market index, which can be done at low cost by using ETFs. On the South African stock market, you'll find one index that is tracked by ETFs: the MSCI South Africa Capped index. The best-performing ETF on this index is the iShares MSCI South Africa UCITS ETF, which has a total expense ratio (TER) of around 0.65% per annum.

Best ETFs for South African stocks

Exchange-traded funds (ETFs) are passively managed investment funds that track the performance of a basket of pre-determined assets. They are traded in the same way as shares, and their main difference is that while one share gives exposure to one company, an ETF gives exposure to numerous companies in a single transaction. ETFs can be traded through your broker in the same way as shares, for example, on the EasyEquities platform.

South Africa is a developing market with a diverse range of companies across various sectors, including mining, finance, and telecommunications. Investing in South African stocks through ETFs can provide exposure to this growing market and help diversify your investment portfolio.

• Satrix Top 40 ETF: This ETF has been voted the favourite ETF for South African investors for six consecutive years at the South African Tracker Funds Awards (SALTA). It offers local equity exposure at a low cost and is a flagship fund on the Johannesburg Stock Exchange (JSE).
• IShares MSCI South Africa UCITS ETF: This ETF tracks the MSCI South Africa Capped index, which includes large and mid-cap South African stocks. It has a total expense ratio (TER) of around 0.65% p.a.
• NewFunds S&P GIVI South Africa Top 50 ETF (GIVISA): This ETF offers diversified exposure to fifty of the largest JSE-listed stocks selected based on intrinsic value and low volatility, at lower costs. It replicates the price performance of the S&P GIVI SA Top 50 Index.
• Satrix MSCI China Feeder (STXCHN): This ETF aims to track the value of the MSCI China Index in ZAR by investing in the iShares MSCI China UCITS ETF. It provides exposure to the Chinese market, which has positive growth prospects, especially with the easing of COVID-19 restrictions and support for the property market.
• Sygnia Itrix New China Sectors ETF (SYGCN): This ETF tracks the performance of the S&P New China Sectors Index, focusing on China- and Hong Kong-domiciled companies in consumption- and service-oriented industries. It aims to achieve long-term capital appreciation.
• CoreShares S&P SA Dividend Aristocrats ETF (DIVTRX): This ETF tracks the S&P South Africa Dividend Aristocrats Index, which includes companies that have increased or maintained stable dividends for seven consecutive years. It provides consistent income and exposure to companies with strong fundamentals.

When considering investing in ETFs, it is important to remember that they are a diverse group of financial instruments, and it is always best to do your own research or consult a financial advisor before making any investment decisions.

Foreign ETFs

Types of Foreign ETFs

• Country-specific ETFs: These ETFs focus on a single country, like the iShares MSCI South Africa ETF, which seeks to track the performance of South African equities.
• Regional ETFs: These ETFs invest in a specific region, such as emerging markets or developed markets. For example, the VanEck Africa Index ETF provides exposure to large-cap equities in Africa.
• Global ETFs: These ETFs offer diversified exposure to equities from all around the world. The Satrix MSCI World ETF and the 1nvest MSCI World Socially Responsible Investment Index Feeder ETF are examples of global ETFs.

Benefits of Foreign ETFs

• Diversification: By investing in foreign ETFs, you can diversify your portfolio across different countries, sectors, and asset classes, reducing the risk associated with investing in a single market.
• Access to International Markets: Foreign ETFs provide South African investors with an easy and cost-effective way to access international markets, such as the US, Europe, or emerging markets like China.
• Currency Diversification: Investing in foreign ETFs can also help you diversify your currency exposure, which can be beneficial in managing exchange rate risks.
• Potentially Higher Returns: Foreign ETFs can provide access to economies and sectors with high growth potential, offering the possibility of higher returns compared to only investing in the local market.

Considerations

When investing in foreign ETFs, there are a few things to keep in mind:

• Currency Risk: Currency fluctuations can impact the returns of your investment. A strengthening rand may reduce the value of your foreign investments when converted back into rand.
• Political and Economic Risk: International markets carry their own set of political and economic risks, which can affect the performance of your foreign ETF investments.
• Tax Implications: There may be tax implications when investing in foreign ETFs, such as withholding taxes or capital gains taxes. It is important to understand the tax laws of the countries in which the ETFs invest.
• Transaction Costs: Investing in foreign ETFs may involve higher transaction costs, such as brokerage fees or foreign exchange fees.

In conclusion, foreign ETFs offer South African investors a great opportunity to diversify their portfolios and access international markets. However, it is important to carefully consider the risks and costs associated with these investments and to ensure that they align with your investment goals and risk tolerance.

ETFs for tax-free savings accounts

Tax-free savings accounts (TFSAs) are a great way to grow your wealth without the burden of taxation. In South Africa, individuals can save money and earn returns on their investments without being taxed on interest earned, capital gains, or dividends. Exchange-traded funds (ETFs) are a popular investment option for TFSAs due to their passive management, diverse shareholdings, and ease of buying and selling. Here are some things to consider when choosing ETFs for your TFSA:

Types of ETFs

ETFs can hold a diverse range of shares across various industries, or they can focus on a specific industry or sector. For example, the Satrix NASDAQ 100 Feeder ETF focuses on the technology sector, while the 1nvest SA Property ETF invests specifically in South African property. Diversified ETFs, such as the Satrix MSCI World ETF, offer exposure to a wide range of global markets.

Choosing the Right ETF

When selecting an ETF for your TFSA, it's important to consider your financial goals and risk tolerance. Some ETFs are actively managed, aiming to outperform the market, while others are passively managed, seeking to replicate the performance of a particular index or asset basket. Additionally, expenses and management fees can impact your returns, so be sure to review the costs associated with each ETF before investing.

Popular ETF Options in South Africa

Several financial institutions in South Africa offer ETFs that qualify for TFSAs. EasyEquities, for instance, provides access to a range of ETFs, including the Satrix NASDAQ 100 Feeder, Satrix MSCI World ETF, and 1nvest SA Property ETF. Standard Bank also offers a tax-free investment account with access to over 250 JSE shares and ETFs, allowing you to buy and sell at any time. Absa offers a tax-free ETF savings account with a reduced brokerage fee of 0.2% and no monthly fees.

Regulatory Considerations

It's important to be mindful of the regulatory limits when contributing to your TFSA. In South Africa, there is an annual limit of R36,000 and a lifetime limit of R500,000 per person. Any contributions exceeding these limits are subject to penalties and taxes. Additionally, ensure that you understand the eligibility requirements and provide the necessary documentation, such as a valid South African ID or passport, proof of address, and tax number.

ETFs for broad asset classes

When considering which ETFs to invest in, it is important to first understand the different asset classes available. Different ETFs invest in different types of assets, such as stocks, bonds, commodities, and currencies. Each asset class has its own set of risks and returns, so it is crucial to assess how they align with your investment goals and risk tolerance. Here is a breakdown of some of the ETFs available for broad asset classes in South Africa:

• Stock ETFs: Stock ETFs are a popular choice for investors as they offer exposure to a diversified portfolio of stocks. Some of the top stock ETFs in South Africa include the Satrix MSCI World ETF, which tracks the performance of companies from 23 developed countries, and the Satrix INDI 25 ETF, which focuses on the 25 largest companies listed on the Johannesburg Stock Exchange (JSE) outside of the Top 40 Index.
• Bond ETFs: Bond ETFs provide investors with access to a basket of bonds, offering a convenient way to invest in the fixed-income market. The Cloud Atlas S&P African Sovereign Bond ETF is an example of a bond ETF available in South Africa.
• Commodity ETFs: Commodity ETFs allow investors to gain exposure to commodities such as gold, platinum, or other critical materials. For instance, the NewFunds Gold ETF and the NewFunds Platinum ETF hold physical gold and platinum, respectively, in secure vaults. These ETFs can be attractive options for those seeking to hedge against inflation and geopolitical risks.
• Currency ETFs: Currency ETFs offer investors a way to invest in specific currencies or a basket of currencies. While there are no specific currency ETFs mentioned for South Africa, ETFs like the FNB Global 1200 Equity Fund of Funds ETF and the 10X SA Property Income ETF offer exposure to global markets and assets.

It is important to remember that the performance and suitability of each ETF depend on various factors, including the underlying assets, expense ratios, tracking errors, liquidity, and tax efficiency. Consulting a financial advisor before making investment decisions is always recommended to ensure that the chosen ETFs align with your specific financial goals and risk tolerance.

ETFs for income

When considering which ETFs to invest in for income, it's important to understand the benefits and risks of investing in Exchange-Traded Funds (ETFs) in South Africa. ETFs are passively managed investment funds that track a basket of pre-determined assets, such as stocks, bonds, or commodities. They offer easy and secure access to stock markets and are ideal for long-term wealth building.

• IShares MSCI South Africa ETF (EZA): This ETF offers exposure to large and mid-sized companies in South Africa, providing targeted access to the South African stock market. It has an expense ratio of 0.59% and has shown positive hypothetical growth over time.
• 10X SA Property Income ETF: This ETF focuses on South African property, providing exposure to the local real estate market.
• Satrix SWIX Top 40 ETF: This ETF tracks the performance of the FTSE/JSE Top 40 Index, which consists of the 40 largest companies listed on the Johannesburg Stock Exchange. It provides a diversified exposure to some of the biggest companies in South Africa.
• 1nvest SA Property ETF: Another option for investing in South African property, this ETF provides access to a range of property-related shares, including real estate investment trusts (REITs).
• Sygnia Itrix Top 40 ETF: This ETF tracks the performance of the FTSE/JSE Top 40 Index, providing exposure to some of the largest and most liquid stocks in South Africa.
• Satrix Quality South Africa ETF: This ETF focuses on high-quality South African companies with strong fundamentals, such as stable earnings and low debt. It aims to provide a more stable investment option.

When considering which ETFs to invest in, it's important to diversify your portfolio and conduct thorough research. Additionally, keep in mind that past performance does not guarantee future results, and investing always carries some level of risk. It is recommended to consult with a financial advisor to determine which investments are best suited to your specific circumstances and goals.

Frequently asked questions