With the ETF becoming an increasing go to choice for investors on the Nigerian Capital Market, it is imperative, market analyst have urged investors on the need to increase knowledge surrounding the product and the indices they track.
The Nigerian Stock Exchange explained an exchange-traded fund (ETF) as a type of fund that tracks the performance of an index, or a commodity. They trade like shares on a stock exchange and derive their value from the index or commodity they track.
Unlike shares or equities, ETF’s were recently introduced into the Nigerian Capital precisely in December 2011 and has since then recorded a 1900 percent growth in 5 years, with about 31.8 percent year-to-date (2016) return to investors, but currently have just 8 ETFs listed on the NSE as against 74 listed on the Johannesburg Stock Exchange
According to the NSE CEO Mr. Oscar Onyema in a publication with Vanguard, the introduction of the ETF’s in December 2011 with cross listing of NewGold ETF with AUM of N287.5m provided investors with new opportunities to diversify their portfolios and access the market.
“The total ETFs in our market has increased to 8 with about 506 ETF investors in the market. The existence of ETFs in our market is beneficial to retail and institutional investors, as ETFs offer a direct and inexpensive way to attain diversified exposure to an index, commodity, sector or region. Investment strategies Aside diversification and tradability” he said
ETFs provide investors the opportunity to diversify their portfolios without going through the rigours of selecting individual securities. For example, when you buy an ETF that tracks the NSE 30 Index, it gives you ownership of a portfolio of shares of all the securities listed in the NSE 30 Index.” He said
The NSE says the ETF’s are for Investors who are looking for benchmark return at a minimal cost, they are also for Investors looking for diversification in a single trade transaction, for investors looking to hedge and spread their risks and for investors who may not have time to actively monitor the market.
Highlighting the benefits of Exchange Traded Funds, the NSE noted that ETFs are very simple and easy to understand. With an ETF, you can emulate the return on capital of a particular index including the underlying assets.
Another benefit is Dividends as ETFs investors enjoy the benefits of dividends on all dividend paying stocks in the constituents of the index.
Furthermore, with a Single transaction and ETF investor can purchase an ETF on a single transaction yet owning a whole portfolio of stocks and at a low cost as There is only one transaction per trade, therefore commissions and management fees will only be charged on that one transaction as opposed to buying individual stocks and be charged individually for each stock. Most ETFs do not have annual fees.
ETF’s are also Tax friendly. Capital gains tax are generally lower for ETFs than the traditional mutual funds due to the structure of each trade. They offer transparency as ETFs, whether index funds or actively managed, have transparent portfolios and are priced at frequent intervals throughout the trading day.
ETFs can also be bought and sold at current market prices at any time during the trading day, offering flexibility unlike mutual funds and unit investment trusts, which can only be traded at the end of the trading day. As publicly traded securities, their shares can be purchased on margin and sold short, enabling the use of hedging strategies, and traded using stop orders and limit orders, which allow investors to specify the price points at which they are willing to trade.
Market exposure and diversification are also a great benefit of ETFs, as they provide an economical way to rebalance portfolio allocations and to “equitize” cash by investing it quickly. An index ETF inherently provides diversification across an entire index.
Since the crash of crude oil prices in 2014, Onyema explained that the equities market has been unattractive for investors, inflation has eroded disposal income significantly affecting savings etc. Despite this, he said ETFs remain a veritable investment option for investors to diversify their portfolios. The Gold ETF for instance has returned 114 percent between 2014 and now. The growth of ETFs in Nigeria has only just begun, with the support of market intermediaries, stakeholders and our regulator, we will continue to grow our ETFs market in terms of AUM, number of listings and trading turnover.
Speaking on plans to boost ETF trading, Onyema stated that “As part of the Exchange’s efforts to develop the ETF market, we instituted an annual ETF Workshop to create awareness of the product, address its challenges and promote its opportunities in Nigeria and Africa.
The workshop is also designed to provide our intermediaries with necessary exposure and skills as it relates to ETFs product sales. In addition, we have put a ton of information about ETFs on our website, in our market data products, and at the disposal of our brokerage community, who interact directly with investors.”