SA’s ETF listing boom set to continue

This year has seen significant activity in the South African exchange-traded fund (ETF) market. Apart from Sygnia’s acquisition of the db x-trackers funds from Deutsche Bank, a raft of new products have listed on the JSE.

When it lists next week, the Sygnia Itrix 4th Industrial Revolution Global Equity ETF will be the tenth new fund to launch this year. There were 48 funds listed at the start of January, so this represents more than 20% growth in 12 months.

Sygnia Itrix has plans for three more listings in the first quarter of next year, and CoreShares has also indicated that it will be listing new products in 2018. In addition, there are potentially two new issuers who may bring new offerings to market next year.

The current growth trend is therefore likely to continue for some time. The question this raises is where the market is reaching a saturation point.

However, strategist at etfSA, Nerina Visser, says that this is a long way off.

“When you look at the size of the ETF industry compared to the rest of the market it is still a drop in the ocean,” Visser points out. “There is still a lot more scope in terms of both assets under management and the range of products that can be offered.”

International exposures

A big driver in this regard is a change that the South African Reserve Bank made to exchange control regulations in February this year. The offshore assets that local ETF issuers hold within ETFs no longer count towards their offshore allowance. In other words, they are now unrestricted in terms of the international funds they can offer.

Together with the introduction of cost effective and efficient ETF feeder fund structures, such as those used by Satrix for its MSCI World and MSCI Emerging Markets products, this opens up huge possibilities.

“It allows a South African issuer to go out and cherry pick funds from the 5 000-odd ETFs issued globally and say which of these would suit the local market,” Visser explains. “This could be an India ETF or Biotech ETF, or any specific exposure. So whereas in the past we tended to look at the potential in the local ETF market as being limited to the 100-odd shares on the JSE that you could trade, this really opens up the global ETF market to SA.”

Gareth Stobie, the MD of CoreShares, agrees that the relaxing of exchange controls is a significant opportunity.

“This opening of the gate so to speak in terms of offering rand-based investments on the JSE that give you global exposure is an area of major growth,” says Stobie. “It becomes very convenient and easy for a local saver to invest globally from their local online share trading account rather than having to externalise funds and open up an offshore stockbroking account.”

Smart beta

Another potential area of growth for local issuers is in smart beta products. These track indices that do not just select and weight stocks on their size, or market capitalisation. This includes dividend funds, low volatility products and value fund such as those that track Rafi or S&P Givi indices.

“There is definitely a trend towards smart beta internationally,” says the head of Sygnia Itrix, Ben Meyer. “And speaking to issuers locally, you are probably going to see more smart beta coming to the fore here too.”

Stobie believes that the relaxation in exchange controls will also play a role in encouraging the launch of more international smart beta products on the JSE.

“So far there has been a bit of a land grab in terms of the major global benchmarks,” he points out. “For instance there are already two issuers offering an MSCI World ETF and now there is an S&P Global 1200 ETF as well.

“That is typical of how ETF markets have generally evolved globally, where broad benchmarks are brought to market first, followed by more specialist strategies,” Stobie adds. “From there you have more specialist geographical categories, smart beta categories and thematic categories as well. They all have their role to play within an investor’s portfolio.”