Exchange-traded funds (ETFs) have become increasingly popular among DIY investors in recent years, as they offer a straightforward way to build a diversified portfolio and access various growth opportunities with a single investment.
An ETF is a type of investment fund and exchange-traded product that holds a collection of assets, such as stocks, bonds, commodities, cryptocurrencies or other securities.
ETFs are designed to track the performance of a specific index, sector, or asset class, and they trade on stock exchanges much like individual stocks.
Accessing ETFs via an online trading platform like Clarity, by Investec, offers investors a more efficient means to gain broad exposure to the best-performing local and global investment opportunities across asset classes, sectors, regions and themes.
Investors can buy and sell ETFs throughout the trading day, and their prices fluctuate like those of stocks.
ETF benefits
As ETFs hold a bunch of investments, they leverage economies of scale to charge lower fees compared to buying individual stocks. It’s like enjoying a bulk discount for your portfolio!
Low fees and minimums allow investors to start investing with small amounts of discretionary capital – Clarity, by Investec has no monthly fees and requires a minimum investment of only R25 to start investing.
ETFs are also liquid investments, allowing investors to access their capital at any time, with the option to buy and sell shares throughout the trading day at market prices. This provides greater liquidity compared to mutual funds like unit trusts, which are only traded at the end of the trading day.
Moreover, most ETFs regularly disclose their holdings, which lets investors see the underlying assets in the fund, providing transparency. This feature makes ETFs easy to understand, offering a simple and cost-effective way to get your share of the markets while benefiting from built-in diversification.
Types of ETFs
ETFs have expanded far beyond basic passive index tracker funds to now include a range of options. These include:
- Index ETFs: Track a specific index, like the S&P 500 (VOO-NASQ). These are the most common types, designed to mirror the market’s performance.
- Bond ETFs: Invest in government or corporate bonds through ETFs like the iShares 1-3 Year Treasury Bond ETF (SHY-NASQ), or iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD-NASQ). These are useful for income seekers.
- Sector/Thematic ETFs: Focus on specific areas like technology via the iShares U.S. Technology ETF (IYW-NASQ), or clean energy via the iShares Global Clean Energy ETF (ICLN-NASQ).
- Regional ETFs: Easily diversify across regions with broad exposure to developed or emerging markets via the Vanguard FTSE Developed Markets Index Fund ETF Shares (VEA-NASQ) or the iShares MSCI Emerging Markets ETF (EEM-NASQ).
- Commodity ETFs: Invest indirectly in assets like gold via the iShares Gold Trust (IAU-NASQ), oil or agricultural products.
- Alternative ETFs: Gain easier exposure to less mainstream alternative investments that may offer higher growth potential, like the iShares Bitcoin Trust (IBIT-NASQ).
Most of these ETFs are passive as they are programmed to follow an index. If the index goes up, the ETF goes up, and vice versa. They don’t try to beat the market; they simply track the market.
Actively managed ETFs
For this reason, another type of ETF growing in popularity, especially among DIY investors looking for market-beating returns, is the actively managed, or active ETF.
Active ETFs are more like traditional unit trusts (also known as mutual funds) but wrapped in an ETF shell.
A manager or team actively decides which securities to hold, when to buy, and when to sell, all with the goal of outperforming a benchmark index.
Pros of Actively Managed ETFs
- Potential to outperform: If the manager makes smart investment decisions, you could do better than a normal index fund.
- Flexibility: Active managers can respond to market conditions in real time instead of blindly following an index.
- Transparency: Most ETFs disclose holdings daily, unlike many unit trusts.
Cons of Actively Managed ETFs
- Higher costs: You usually pay more in fees than you would with a passive ETF.
- No guarantees: Beating the market is harder than it sounds. Many active managers fail to outperform their benchmarks consistently.
- Manager risk: Your returns depend heavily on the skill of the manager.
Are managed ETFs for you?
If you’re a DIY investor who prefers to keep things simple, low-cost index ETFs are often the easiest way to build long-term wealth.
However, if you like the idea of giving part of your portfolio to a professional who might spot opportunities, and you don’t mind paying a little more for the chance, actively managed ETFs could be worth exploring.
