ETFs A Beginner’s Guide: Part 2

Incorporating ETFs Into Your Portfolio

Our first ETF beginner’s guide in this series highlighted some of the benefits offered by ETFs – including liquidity and cost saving.

ETFs provide low-cost broad exposure to different asset classes that helps with the diversification of your portfolio. For example, if you had a large exposure to a specific geographic region or country within your portfolio, you could use an ETF to balance this out with exposure to a different geographic region – thereby reducing the overall risk in your portfolio.

Is There a Downside to Investing in ETFs?

ETFs, just like unit trusts, are affected by world and economic events.  Therefore, it’s best to remain invested for the longer term – five years or more.  This will give your investment time to grow, and you’ll see the volatility, or market ‘ups-and-down’s, smooth out over time.  If you know and understand your personal risk profile, and have selected your ETF accordingly, you can leave your investment to grow. If your investment is in line with your overall strategic investment plan, it should not be necessary to make any changes unless your personal circumstances change.

Understanding the Minimum Disclosure Document

The minimum disclosure document (MDD) or fund fact sheet – is where you will find all the vital information about your selected ETF. It is a ‘cheat sheet’ that provides detailed information about the fund to assist you in your investment decisions.  

The Satrix MDDs outline the fund objectives, known as the investment mandate, and key characteristics. For instance, it will outline a particular fund’s index, fees, recent performance, top 10 investments held, distribution of income or dividends paid out over the past 12 months as well as the risk level.  

MDDs are included on the “Our Funds” tab on our website. For example, the Satrix Top 40 ETF page has an easy-to-find download button for the MDD. 

Also, under our fund summary pages, each fund tile has a “downloads” button that gives you an option to download the relevant MDD.

What is the TER, Transaction Cost and Management Fee?

There are various costs associated with investments in ETFs: 

Total Expense Ratio (TER): The Total Expense Ratio (TER) measures the overall costs associated with running a fund, and these costs are typically charged within the fund itself, meaning they are not directly deducted from your account but are incurred at the fund level. For instance, a 0.10% TER on a R100 investment translates to an annual fee of 10 cents. Understanding the TER is crucial for assessing the suitability of a fund once all fees are considered.

Transaction Costs: Transaction costs encompass all charges related to buying and selling the underlying holdings within the fund. Similar to the TER, these costs are incurred at the fund level.

Management Fee: The management fee is a charge imposed by an investment manager to cover the cost of their time, resources, custodial services, and other expenses. This fee is included in the TER.

Understanding Performance

When it comes to performance, it is important to differentiate between the fund performance and the investor performance (or your investment account performance). 

The MDD displays the performance of the fund at various periods (one year, three years, five years, etc.) and the reporting periods are always from month beginning to month end. For example, a three-year performance period on 31 March 2023 would be from 1 April 2020 to 31 March 2023. 

Fund performance numbers shown include both capital growth and income earned by the fund (from the fund constituents). They are also net of the fees described above. 

An annualised return is a measure of how much an investment has increased on average each year, during a specific period. Annualised returns can only be reported for periods of 12 months and longer. For example, an annualised return of 8% over three years means that for each of those three years, the funds would have yielded a return of 8%.

Cumulative returns show the total percentage growth of the fund from the beginning of the calculation period to the end of the period.

It is important to note that your personal investment account performance results can differ from the performance of the fund as reflected in the MDD. This could be because you may have started investing in the fund at some point during the period or you may have made multiple small investments. Also, you may have withdrawn money during the period. Even if you replace your withdrawal amount later, your returns may not match the fund's return. This is because a fund’s performance over a given time period assumes the investor’s money was invested throughout the period.  However, if you had planned to invest for the period, but needed to withdraw money, this will impact your individual return.

Fund performance numbers assume that all the dividend and interest payments distributed during the period were immediately reinvested in the fund. If you selected to receive the distribution payments instead of reinvesting them, this would affect your personal investment account performance.

What is a Distribution?

Most ETFs receive income from underlying investments such as dividends and interest payments. Typically, the fund will use the income earned from the underlying investments to pay expenses incurred in the fund; and will distribute the net income to the unit holders.

Therefore, a distribution is a payment made to you, the investor, in the form of a dividend or interest payment. These payments are often paid in regular intervals (monthly, quarterly or annually) depending on the fund. Some funds are non-distributing, which means the dividends are automatically reinvested back into the fund on your behalf. 

When investing in a particular ETF, you can find out if the fund is a distributing fund by looking at the MDD.

Understanding a Fund’s Risk Profile

Funds have risk profiles linked to whether they offer investors a Low (or Cautious), Medium (or Moderate) and High (or Aggressive) risk. The risk profile is based on what the fund is invested in, with the higher-risk funds typically being invested in equities and the lowest-risk ones including a large portion of cash. 

The riskier funds often can deliver greater returns in the long run, but you should consider remaining invested for longer periods to ‘smooth’ performance when there are market downturns. The lower-risk funds will likely deliver lower returns but will be less volatile. 

Conclusion

ETFs allow investors to create an optimal, diversified portfolio and can also be included as an underlying investment option in a Tax Free Savings Account or a retirement annuity. If you have not yet started your investment journey, visit our website to find out more about our platform, SatrixNOW, and read up on our Satrix Access Range to help you get started with your investment journey.

Disclaimer: 

Satrix Investments (Pty) Ltd is an approved FSP in terms of the Financial Advisory and Intermediary Services Act (FAIS). The information does not constitute advice as contemplated in FAIS. Use or rely on this information at your own risk. Consult your Financial Adviser before making an investment decision. 

While every effort has been made to ensure the reasonableness and accuracy of the information contained in this document (“the information”), the FSP, its shareholders, subsidiaries, clients, agents, officers and employees do not make any representations or warranties regarding the accuracy or suitability of the information and shall not be held responsible and disclaim all liability for any loss, liability and damage whatsoever suffered as a result of or which may be attributable, directly or indirectly, to any use of or reliance upon the information. 

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