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Investors in offshore exchange-traded funds (ETFs) have not experienced exceptional increases in their investments over the past year as the strong rand offset global market rallies, yet offshore ETFs continue to gain popularity as a relatively cheap entry into global investment.
While there are only a handful of options on the JSE, this is set to change this year as several new listings are anticipated in the near future.
The performance of offshore ETFs to date has been variable, depending on the time frame. If you are looking at performance over one and three months, there has been quite a nice comeback, says etfSA.co.za managing director Mike Brown, as there has been a little rand weakening on South Africa’s downgrade and improved global equity markets.
Over the past year, however, rand strength offset the benefits that offshore ETFs should have got from global equity markets when they were at an all-time high.
But the further back you go, Brown says, the rand has depreciated 9% per annum against the dollar, and one of the best ways to lock in rand hedge exposure is to invest in a global index. “Of course, it all depends on your timing, but there is nonetheless a case to be made for a certain portion of your investment to be exposed internationally through ETFs.”
At the moment, investors are not spoilt for choice when it comes to locally listed offshore ETFs. There are only a handful, with exposure largely to major indices in major markets and little room for specialisation.
More options are coming soon, says Brown.
In the meantime, offshore EFTs’ performances have, in general, outstripped the acklustre JSE, even with the rand’s strength.
Among the available ETFs, the Deutsche Bank MSCI US and World ETFs have been the most popular, as they offer broad exposure to the biggest indices and underlying companies in the world.
“We are also seeing a lot of new money flowing into the CoreShares S&P 500 ETF, as opposed to ETFs which track the top 600,” Brown says. Its popularity probably reflects it being a bit cheaper than the DBX MSCI US Index.
Another ETF gaining popularity is CoreShares’ global property fund, which includes the top 40 listed property companies. “This offers investors a different asset class and quite a high dividend yield,” explains Brown.
The benefit of offshore ETFs on the JSE, as opposed to buying into a wide choice of ETFs available globally through an offshore allowance, is that the rand-based offshore ETFs are listed on the JSE, making the investment simple with no forex requirements.
Investors can, alternatively, turn their rands into dollars and buy into a range of offshore ETFs, but Brown says this can be expensive as it involves currency conversion, and may require permission and tax clearance. The other problem, he says, is that many South Africans complain that getting someone to manage international investments for them is not easy.
Buying offshore ETFs locally is a lot cheaper and a lot more convenient, Brown says, but the challenge is that you are dealing in rand so the price depends on what happens to the rand-dollar exchange rate.
For most investors, exposure to international investments through the JSE or locally based foreign unit trusts is enough, and there is increasing interest in locally listed offshore ETFs. “We are about to see a series of new listings offering different kinds of exposures,” he adds.
What you should know about investing in offshore ETFs
- There is no limit as locally listed offshore ETFs do not form part of your offshore allowance.
- There are one-off trading fees when ETFs are bought or sold. Additional fees are incurred if you invest through a stockbroker or an investment plan.
- Be aware that you do not actually own the underlying share, only a portion of it.
- Profits on the sale of ETFs are subject to capital gains tax.
- You can invest through a stockbroker or through etfSA.co.za or through its itransact (www.itransact.co.za) platform.
This is part of our cover story on offshore investing, which is brought to you by Investec. It originally appeared in the 18 May edition of finweek. For the rest of this story, you can buy and download the magazine here.
