Exchange Traded Funds (ETFs)

Exchange Traded Funds (ETFs) are professionally managed, pooled and listed investments funds. The investment fund typically invests in a basket of shares, currencies, commodities or other securities and investors buy units from the fund, which units are listed on an exchange.[1] In simpler terms an ETF is a bundle of investments that trades on an exchange, like a stock. ETFs can diversify your portfolio and are relatively cheap.

Background

An ETF is a type of security that involves a collection of securities that often tracks an underlying index. This makes an ETF a basic derivative as the value of the units issued by the investment fund are dependent on the value of the shares, currencies or other securities in the basket. ETFs can contain many types of investments, including stocks, commodities, bonds, or a mixture of investment types. This investment offers investors an opportunity to own 10 underlying stocks through one investment in the ETF. Currently the Top Ten index is reviewed once a quarter. The ZSE Top 10 Exchange Traded Fund has brought a new dimension to the country’s limited capital markets.[2]

Types of ETFs

There are many types of Exchange-Traded Funds. Some of the most common ETFs include:

  • Stock ETFs – these hold a particular portfolio of equities or stocks and are similar to an index. They can be treated like regular stocks in that they can be sold and purchased for a profit, and are traded on an exchange throughout the trading day.
  • Index ETFs – these mimic a specific index, such as the S&P 500 Index. They can cover specific sectors, specific classes of stocks, or foreign or emerging markets equities.
  • Bond ETFs – an exchange-traded fund that is specifically invested in bonds or other fixed-income securities. They may be focused on a particular type of bonds or offer a broadly diversified portfolio of bonds of different types and with varying maturity dates.
  • Commodity ETFs – hold physical commodities, such as agricultural goods, natural resources, or precious metals. Some commodity exchange-traded funds may hold a combination of investments in a physical commodity along with related equity investments – for example, a gold ETF might have a portfolio that combines holding physical gold with stock shares in gold mining companies.
  • Currency ETFs – these are invested in a single currency or a basket of various currencies and are widely used by investors who wish to gain exposure to the foreign exchange market without directly trading futures or the forex market. These exchange-traded funds usually track the most popular international currencies such as the U.S. dollar, Canadian dollar, Euro, British pound, and Japanese yen.
  • Inverse ETFs – An inverse exchange-traded fund is created by using various derivatives to gain profits through short selling when there is a decline in the value of a group of securities or a broad market index.
  • Actively Managed ETFs – these ETFs are being handled by a manager or an investment team that decides the allocation of portfolio assets. Because they are actively managed, they have higher portfolio turnover rates compared to, for example, index funds.
  • Leveraged ETFs – Exchange-traded funds that mostly consist of financial derivatives that offer the ability to leverage investments and thereby potentially amplify gains. These are typically used by traders who are speculators looking to take advantage of short-term trading opportunities in major stock indexes.
  • Real Estate ETFs – These are funds invested in Real Estate Investment Trusts (REITs), real estate service firms, real estate development companies, and mortgage-backed securities (MBS). They may also hold actual physical real estate, including anything from undeveloped land to large commercial properties.[3]

Introduction on the Zimbabwe Stock Exchange (ZSE)

As part of efforts by the domestic bourse to offer wide investment choices to investors, the Zimbabwe Stock Exchange (ZSE) introduced ETFs in early 2020. In preparation of the introduction of ETFs, the ZSE conducted training on 29 November 2019 to ensure that the public understood the basics of ETFs.

The training outlined the risks and benefits of this form of investment and how they were to be traded on the exchange. The major benefits of ETFs being offered to the investing community include the following:

  • an increase in the number of available investment options.
  • ETFs will allow investors to get exposure to asset classes that are difficult to access directly, for instance commodities.
  • retail investors will also benefit from ETFs through the breaking down of large investments into smaller units that can then be bought and sold in the secondary market.
  • ETFs provide investors with the ability to gain exposure to a broad market in one transaction.
  • listed ETFs are safer as they are fully hedged by underlying assets.
  • ETFs are passive in nature therefore they tend to have low fee structure than the actively managed funds.
  • The investable indices are investor driven and issuers will be free to list ETFs focusing on different themes

The ZSE introduced relevant indices to the market. Some of the indices will be sector specific (e.g. consumer services and financial) and others are size based (small, mid and large cap).

Old Mutual Zimbabwe ZSE Top 10 ETF

THE Zimbabwe Stock Exchange (ZSE) said the Old Mutual Zimbabwe ZSE Top 10 Exchange Traded Fund (ETF) launched earlier in December 2020 were listed on the bourse’s main board on 4 January 2021. ZSE chief executive officer Mr Justin Bgoni said investors who wished to invest in the exchange’s top 10 stocks security should consult their stockbroker or financial advisor for guidance.

The diversified financial services group, with interests in banking insurance and property sectors, earlier indicated it will provide initial seed capital for the newly introduced publicly traded security. Old Mutual said it was putting initial seed capital in the form of scrip in the exact weights of the top 10 index stocks listed on the domestic exchange. The fund will then be listed on the ZSE by way of introduction. Additional investments from other investors will be used to buy shares on the market to add to the portfolio.

According to Old Mutual, all assets of the ETF will be held by CABS Custodial Services, who will act as custodian for the fund. Stanbic Bank is the fund’s trustee.

Availability on ZSE Direct

The Zimbabwe Stock Exchange (ZSE) advised its stakeholders on 9 February 2021 that the Old Mutual ZSE Top Ten ETF was now available through ZSE Direct. To invest in the Old Mutual ZSE Top Ten ETF, one is required to have an existing account on ZSE Direct or a trading account with their stockbroker. If one doesn't have a ZSE Direct account they can register on www.zsedirect.co.zw

Once you login to your ZSE Direct account, select the Buy tab and choose the ETF tab to start trading. For any inquiries, email zsedirect@zse.co.zw

Advantages of ETFs

There are many advantages to investing in an Exchange-Traded Fund, including the following:

  • Lower transaction costs and fees
  • Accessibility to markets
  • Transparency
  • Liquidity and Price Discovery
  • Tax Efficiency




References

  1. [1], The Herald, Published: 23 December, 2019, Accessed: 3 February, 2021
  2. [2], Herald, Published: 4 January, 2021, Accessed: 3 February, 2021
  3. [3], Corporate Finance Institute, Accessed: 3 February, 2021