Company:Deutsche Bank Securities
Author: Kari van Rensburg
Email: editor@itinews.co.za
Posted: 31 Aug 2010
A good way to start growing wealth, at low cost, and through a small monthly savings contribution
Savings is not just about putting money in the bank and earning an after tax return that probably will not beat inflation. It also means setting aside funds that will create wealth over the longer term.
This means going into the equity market and investing in shares.
However investors are faced with an overwhelming choice. To go directly into individual shares using a stockbroker can be difficult, especially if small monthly amounts are involved.
There are brokerage and holding costs and investors need to decide which stocks are deserving of their money.
An effective way of getting into the equity market, especially if small monthly contributions are involved, is through Exchange Traded Funds (ETFs). These are stock exchange-listed, passively managed index-tracking funds.
They mirror the performance of specific segments or regions of equity markets, such as the blue chip MSCI World Top 40, or they can be sector-specific such as industrial, financial and resources.
The ETF route very easily facilitates monthly savings - and for small amounts. Investors can purchase ETFs via their stockbrokers or Financial Advisors. Direct purchase from the ETF provider is also available with entry levels as low as R300 / month.
It would not be possible to do the same by going directly into specific shares. A few hundred rand would buy less than a handful of shares, and be reduced by minimum brokerage and administration costs.
Through a regular monthly ETF contribution investors also get a variety of entry points into the market - not just at high or low singular points. Over a period of time, it becomes a case of swings and roundabouts - or Rand-cost averaging.
The volatility of the stock market gets minimized as the investor is buying into it at many levels throughout the investment time period.
The investor with a long term view, and through monthly contributions, participates in all cycles of the market and effectively takes the peaks and troughs out of performance over the long term.
Actively managed unit trusts (or collective investment schemes) also offer investors an easy, low threshold and regular way of getting into the equity market.
These are funds that are managed by specialists and aim to beat benchmarks. However, this specialist expertise comes at a cost as fund managers and analysts have to be paid.
Unit trust fees can drag down a return, especially a modest one, and they do erode wealth. The key argument against this form of active investment is that these funds do not outperform market benchmarks over time - and numerous statistics back this up.
For those wanting to achieve market returns (nothing in excess of this, and certainly nothing below), at a low cost, and often with no minimum once off entry contribution, the ETF products offer an attractive avenue.
They can be done through small and regular purchases by experienced investors and those just staring out alike.
Investors who would like to diversify by purchasing exposure to offshore equity markets can do so by purchasing ETFs that are listed in South Africa but that give exposure to offshore markets.
Foreign stock markets can perform differently over time to the Johannesburg Stock Exchange and investors would want to participate in this - knowing that for some periods, they may be outperformance and for some periods the inverse may be true.
South African investors have a R4 million investment allowance for going directly into offshore investments.
However, to avoid this exchange control regulation, yet still get offshore equity exposure, they can invest in Rand-denominated products offered by a local financial services company.
Money invested in these vehicles gets allocated into foreign investment opportunities, such as Rand-denominated Exchange Traded Funds (ETFs).
There are presently five such foreign exposure ETFs currently listed on the JSE. Deutsche Securities is the product provider of these db x-trackers ETFs. They track indices which encapsulate the World, USA, Japan, Europe, and the UK. These products provide diversification into international equity markets, and also protect against Rand depreciation.
Although they give offshore exposure, they are quoted in SA Rands and are regulated by the South African Financial Services Board.
From iti news published on 31 Aug 2010
