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A starter’s guide to Exchange Traded Funds (ETFs)

Putting all of one’s eggs in a basket is not a smart move, and this is why investment experts advise clients to spread risks and maximum returns by putting their money in different types of stocks or a number of assets.

Exchange Traded Funds (ETFs) is an easy way to achieving this.

An ETF is simply an investment vehicle that tracks an underlying asset, a basket of assets, an index or a commodity. It can be bought and sold as easily as stocks.

There are varieties of ETFs like Equity Funds, Fixed-income Funds, Commodity Funds, Currency Funds, Real Estate Funds, Multi-Asset Funds, and Alternative Funds among others.

What all these different ETFs do is replicate the performance of the assets they track. A gold ETF will rise by 10 percent in a day, if gold price increase by the same extent.

The same is true about Equity ETFs which capture price movement of a select group of stocks.

As such, ETFs are an easy way to diversify your portfolio and hold multiple stocks or assets in one basket that offers benefits inherent in stocks and mutual funds.

On the NSE, there are 10 ETFs currently listed according to exchange data. Some of them include Greenwich Alpha ETF, Vetiva Banking ETF, Lotus Halal Equity ETF among others.

“These ETFs track indices that categories stocks based on certain criteria,” said Taiwo Yusuf, Head Asset Management of Lagos-based Meristem Wealth Management Ltd, at at the Smart Investment Workshop themed, “Using Exchange Traded Funds (ETFs) as a Proxy for Investing in Nigerian Equities” in Lagos Friday.

Yusuf explained that indices can be created to track stocks based on market capitalisation eg NSE 30, based on sectors eg NSE Banking 10 or it could be factor-based tracking either macroeconomic indicators or style (Value or Growth).

In the case of value, the ETF tracks a value index (that is a collection of stocks that are priced cheaper compared to their fundamental value.).

On the other hand, the ETF could mimic a growth index (a basket of stocks that have shown consistent historic growth and potential for upside in the future).

“In the last five years, Meristem Value Index has delivered a cumulative return of 61 percent while the Meristem Growth Index has surged 50 percent,” said Yusuf. “In the same time NSE All Share Index and NSE 30 have declined by 13.64 percent and 14.4 percent each.”

ETFs are professionally managed which means the choice of stocks that go into a basket are determined by a rigorous process that is independent of the retail investor, who still have control of the ETFs and can sell or buy as they wish.

Why Invest in ETFs?

ETFs are cost effective to operate than actively managed funds because ETFs have less frequent portfolio change.

ETFs are transparent, offer diversification and are easily tradable.

They also have no minimum investment, minimum holding period and price of an ETF is very close to its Net Asset Value (NAV).

More so, the structure of ETFs allows market participants to redeem shares from the baskets of the fund’s underlying assets.

 

How to buy ETFs?

ETFs can be bought on the NSE through any Dealing Member Firm.

They can also be bought in the primary market e.g. approaching investment houses like Meristem directly.

Ultimately ETFs are regulated by the Securities and Exchange Commission (SEC).

 

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