What is an ETF (Exchange Traded Fund)?
An ETF is an Exchange Traded Fund (also known as a passive investment) which typically tracks an index or basket of shares. Most ETF’s track an index such as the JSE Top 40 or JSE All-Shares.
ETF’s are called “passive investments” as they merely track an index and they provide the average performance of the asset class or index being tracked.
Alternatively, Investing into unit trust funds is called “active investing” as the fund managers (such as Coronation, Allan Gray, Investec etc.) make active decisions as to what shares or assets to buy and sell, and do not merely track an index such as the JSE. This method of investing aims to outperform an index or benchmark, as opposed to just tracking an index over time.
The Flaws in the Case for Passive Investing
Karl Leinberger, the CFO of Coronation, recently wrote a piece aptly named the Flaws in the Case for Passive Investing which addresses the question as to whether investing into an ETF is more beneficial than investing into a normal unit trust fund.
He noted the following:
Inactive (passive) investing does not actually exist
- The actual decision to invest into an ETF is an active decision, as you as the investor has to select the underlying assets or index that you would like to invest into. Therefore you are making a very active decision by yourself, without the aid or advice of professional fund manager or adviser.
The passive asset allocation process is flawed
- ETF’s are typically ‘hardwired’ to make rules-based asset allocation decisions using passive building blocks. While they may pitch this asset allocation as passive, truthfully, investors are buying a fundamentally active asset allocation strategy.
Passive products are not appropriate in a highly concentrated market such as SA
- Overseas ETF’s are attractive as investors gain exposure to a whole index and this eliminates stock-specific risks from their portfolios.
- However, here in SA, the top 10 stocks make up 47% of our local SWIX index, which means that investing into a JSE ETF will be very concentrated and not diversified as desired by investors.
The passive sales pitch is premised on low fees. This is often far from the truth.
- The Total Investment Charge (TIC) for the five largest equity trackers in the retail market are still very high at 0.78% per annum
Find the full article at the attached link: The Flaws for the Case for Passive Investing