Cape Town, Wednesday, 17 May 2023: This year marks the 30th anniversary of one of the most significant financial innovations of modern times - Exchange Traded Funds (ETFs). With consistently strong performance, ETFs have been instrumental in democratising investing, and currently boast an impressive $US10 trillion in assets under management (AUM).
After record inflows in recent years, it is predicted that ETFs will hold over $US20 trillion by 2026, representing a compound annual growth rate of 17% over the next five years. The growing popularity of ETFs can be attributed to their accessibility, making them one of the most popular investment products globally.
Satrix introduced the first ETF to South Africa in 2000, and investors have never looked back. ETFs have seen an increase in fund inflows in South Africa due to their resilience, making them an attractive option for investors looking to weather the pandemic storm and current tough economic times. Currently, ETFs have an AUM of R129 billion in South Africa.
Fikile Mbhokota, CEO of Satrix, says ETFs are, arguably, the single-most disruptive product the market has ever seen. “Prior to the advent of ETFs, investing was expensive, could be confusing to beginners, and offered fewer options for portfolio diversification. ETFs changed all that, providing a basket of securities that trade on an exchange, like a stock, allowing investors to access a wide array of different exposures at minimal cost.”
She said the introduction of ETFs has transformed the investing landscape, making investing accessible to everyone and allowing individuals to make their money work harder for them at minimal expense. “The market has transitioned from being predominantly composed of wealth managers buying shares to a more diverse investment market accessible to all. The impact of ETFs has been seismic, and their significance in democratising investing, particularly in South Africa, and helping retail investors ‘own the market’ cannot be understated.”
Major milestones for the world’s greatest financial innovation
Here is a timeline of its greatest hits so far, according to Mbhokota:
- The ETF is born: There were a few ‘prototype’ ETFs, from Wells Fargo’s efforts to the Toronto 35 Index Participation units. Then, 30 years ago, in 1993, State Street Global Advisors launched the Standard & Poor’s Depositary Receipt (SPY), the first US-based Exchange Traded Fund (ETF), which tracked the S&P 500. It’s known as SPDR today, pronounced ‘Spider’. It’s still the largest ETF in the world, with over $370 billion in assets under management, consistently trading over 80 million shares daily. It was physicist-cum-submarine-specialist Nathan Most’s ‘baby’, and it took him about six years to launch.
- Dotcom changed everything: The Dotcom boom catapulted ETFs into public consciousness, thanks to the proliferation of the internet, which fueled S&P 500 growth of 28% a year, on average, between 1995 and 1999. This catalysed growing awareness of the power of indexing to ‘own the market’, versus stock picking.
- A big Millennium moment: In 2000, European ETFs launched for the first time, following approval from the Undertakings for Collective Investment in Transferable Securities (UCITS) directive from the European Union. In 2000, ETFs had $65 billion in assets. By 2010, this grew to $991 billion. 2000 also saw the first factor-based ETF come into existence in the US.
- Satrix brings ETFs to South Africa: Satrix pioneered its flagship Satrix 40 ETF, the first-ever South African ETF in November 2000, the same year the product launched in Europe. Kingsley Williams, CIO of Satrix, says, “We pioneered index tracking in South Africa to disrupt the status quo. Today, the power of investing belongs to everyone.”
- The Dotcom bust (2000-2002): The Dotcom bust showed many investors that trying to beat the market was incredibly difficult to do with any degree of consistency. A low-cost, well-diversified fund, with low turnover and tax advantages was an attractive option in a time of total upheaval, so ETF uptake grew considerably.
- Bonds arrive: Bond ETFs were launched in 2002, giving investors more opportunity to build diversified portfolios at low cost. It took close to 20 years for bond ETFs to surpass $1 trillion in global assets. Blackrock predicts they’ll hit $2 trillion by 2024. Commodity ETFs came shortly after bonds. All these different asset classes helped further democratise investing.
- Active ETFs arrive: 2008 saw the first actively-managed ETFs launch, combining the traditional benefits of ETFs like low fees and tax efficiency, while capturing an active investment strategy. South Africa was only to see the Active ETF landscape materialise in 2023.
- ETFs ramp up in retail: ETFs started to gain traction in the retail market (non-professional) during the 2010s, driven by education and awareness, and people’s cost sensitivity and desire for transparency. They offered a plethora of interesting products at excellent price points. They also allowed astute investors to stay ahead of the curve, without having to wait for forward pricing for trust and mutual funds.
- The $1 trillion milestone is met: ETFs hit the trillion mark in assets under management in 2009.
- Sustainable ETFs take off: There’s been growing demand for sustainable and ESG-linked ETFs that allow investors to align their values with their investments. Satrix was the first to launch an ESG ETF in South Africa in 2019, with its Diversity and Inclusion ETF. Global ESG ETFs have had a 90% compound annual growth rate from 2015 to 2020. In 2020, ESG ETFs took approximately 10% of overall ETF flows globally. Sustainable assets are expected to double by 2025.
- No more minimums: In 2015, South Africa had another major ETF milestone when Satrix removed all minimums, making investing more accessible than ever before, with the launch of SatrixNOW.
- Invest more, offshore: ETFs also gained a lot of traction in South Africa because they allow for 100% offshore exposure, without people having to lose their foreign allowance capacity. Satrix’s partnership with iShares, for example, has been a major game changer for accessing foreign markets.
- Covid-19 caused major adoption: Counterintuitively, during the pandemic Satrix saw record investing inflows to ETFs. ‘Locked’ at home, many people had some disposable income available, and ETFs presented a safer option, in a time of serious distress. In 2019, the total AUM in the SA investment market was about R6 trillion, of which 5.3% was made up of indexed assets. This rose to R6.7 trillion (6.7%) by the end of 2021. Globally, the pattern was the same, with the pandemic pushing major money into index products, like those tied to the S&P 500.
- The first crypto ETF arrives: 2021 saw the first ever Bitcoin ETF launch in the US.
- Passive surpasses active: In 2022, the AUM of equity indexed funds surpassed active funds in the US for the first time. Research shows global net inflows into indexed strategies have been far more consistent, relative to active funds, attracting 59% of new net flows from 2009 to 2019.
“Happy 30th birthday to ETFs. They brought an evolution in portfolio construction with greater choice, more features, reduced costs, and a consistently compelling performance. And their next chapter promises greater growth than ever before,” says Mbhokota.
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