The total market capitalisation of the South African exchange traded product (ETP) industry grew to R136 billion at the end of last year, an increase of 22.5% on the R111bn at the end of 2020, according to statistics released by etfSA.
The number of ETPs in issue grew from 137 at the end of 2020 to 168 at end of 2021.
Mike Brown, the managing director of etfSA, says the growth in JSE-listed ETPs was largely propelled by the good returns on the global and local equity markets, which raised the market capitalisation of leading companies and assets covered by ETP portfolios.
Capital of about R5.1bn (net of redemptions) was also raised by new and existing ETPs in 2021.
Big three dominate the market
The ETP industry is dominated by Satrix Managers, Sygnia Itrix and Absa Capital, which have 27.3%, 25.6% and 22.5%, respectively, of the market. Collectively, they hold more than R100bn – about 75% – of the market’s R136bn.
Until the end of 2020, Absa was the biggest issuer of exchange traded funds (ETFs) in South Africa, mainly because of their issues of commodity ETFs. However, Satrix and Sygnia overtook Absa in 2021.
Satrix was the most successful raiser of new capital in 2021, at R4.7bn, followed by Sygnia, at R3bn, and Union Bank of Switzerland (UBS), at R1.1bn.
Satrix and Sygnia have focused on issued foreign-referenced ETFs and, more recently, on “thematic” ETFs.
Last year, Sygnia issued its Solactive Healthcare ETF, which invests in innovative healthcare companies worldwide, while Satrix issued its Global Infrastructure ETF and its Innovative & Diversity ETF, which tracks qualifying companies in South Africa that focus on gender equality and inclusion.
Commodity-based ETFs came under price and redemption pressure last year, after providing strong investment returns from 2016 to 2020.
Absa, which issues the NewGold ETFs tracking gold, platinum and palladium, redeemed R2.5bn commodity ETFs during 2021, while 1nvest, which also issues ETFs tracking PGMs, redeemed R3.8bn commodity ETFs, Brown says.
Growth in ETNs
One of the features of the ETP sector over the past two years has been the increase in the number of exchange traded notes (ETNs) in issue, from 29 in 2019 to 82 in 2021.
Brown says ETNs offer greater flexibility than ETFs because:
- They can allow for actively managed as well as index-tracking portfolios;
- They are cheaper to list and operate than ETFs;
- They do not require 100% physical cover for the indices they track and so allow for quantitative technologies that can track indices without having to fully replicate them; and
- They rely on the “guarantee” of the issuer company to provide the full return of the index being tracked, rather than physically holding the assets that constitute the index.
That the issuer of the ETN has to guarantee that they will give investors the total return of the index means the issuer’s creditworthiness is important.
To date in South Africa, only blue-chip local banks and UBS have issued ETNs, all of which have strong credit ratings, Brown says.
He says public acceptance of ETNs has been slow, mainly because they do not fully replicate indices, as in the in case of ETFs, and accordingly are regarded as riskier. They are also not allowed as investments in tax-free accounts, and some portfolio mandates restrict investment in ETNs.
The total assets under management for ETNs stands at R14.8 million, or only 10.8% of the industry.
Investors prefer vanilla products
Brown says investors seem to prefer the certainty of 100% physically backed ETFs, rather than ETNs that rely on the creditworthiness of the issuer to support their delivery of index-tracking returns.
Although ETNs have the same regulatory requirements and restrictions as ETFs, investors have still to be reassured and convinced of the merits of ETNs, he says.
Retail investors have preferred “vanilla” index-tracking ETFs. For instance, they did not take to the smart beta ETFs listed a few years ago, Brown says, and asks whether investors will take to the fairly complex “thematic” and “style” ETFs and ETNs currently being issued on the JSE.
“While investing in the mega themes that will probably dominate the post-Covid-19 global economy could be rewarding over time, the relative complexities of these products will require some education of the investing public.”
