SIMON BROWN: I’m chatting now with Mike Brown, managing director at etfSA. Mike, I appreciate the early morning time.
You put out a report yesterday on the exchange-traded product industry for 2021. Assets under management were up 22.5%, now topping R136 billion. Perhaps the big standout for me were two points.
The first is massive growth in exchange-traded notes, which are slightly different from ETFs. We’ve seen FNB issuing a lot but we have gone from 2019, two years ago, to R82 billion at the end of 2021.
MIKE BROWN: Good morning, Simon. Last year was a good year for the ETP [exchange-traded product] exchange for the product industry, as you say. There was a growth of nearly R25 billion in the market cap of the industry or an increase of 22%, and the number of ETFs in issue went from 137 in 2020 to 168 at the end of 2021. Now there are only about 300 companies listed on the JSE, and unfortunately there are 168 ETFs and ETNs.
One of the issues you do point out, though, is that there was a big increase in the number of exchange-traded notes issued on the JSE during the course of last year. An exchange-traded note is a listed security, just like an exchange-traded fund, but the difference is with an exchange-traded fund the issuer of the security has to hold the underlying portfolio of shares. So, if you are issuing an ETF on the Top 40, you have to own all the Top 40 shares and exactly the constituent weightings that make up the index so your portfolio that you hold exactly replicates the index, and therefore the price of the ETF trades at the price of the index.
With exchange-traded notes, you are not compelled to hold the full portfolio, so you can duplicate or replicate an index using quantitative techniques or whatever you have. You may say, ‘Well, I can duplicate the Top 40 Index by only owning 20 shares, rather than all 40 shares, because I can do some fancy footwork and mathematics and my 20-share portfolio effectively replicates the index’.
But then whoever issues that ETN has to guarantee that they will give you the performance of the index – not only the index, but the income from that index – so they give you the total return. The big difference with an ETN is that whoever issues an ETN has to guarantee that the return of that ETN gives you exactly the return of the index, and therefore you have to take the creditworthiness of the issuer of the ETN into account.
SIMON BROWN: In the case of South Africa, we have a couple of big banks. We’ve got the Union Bank of Switzerland, UBS; it’s not a zero risk, but I would call it a very small risk.
The other point that really struck home in the report you sent out – you list the different managers and their holdings, three of them – Satrix, Sygnia and Absa collectively have 75% of the market, which is big slice, but [they are] also highly competitive. They have respectively 27.5%, 25.5%, and 22.5%. We’ve actually got a very competitive ETP space, which is great for investors.
MIKE BROWN: Yes, it is. It’s over R100 billion of the R137 billion that’s issued by just three companies – as you say, Absa Capital, Sygnia, Itrix and Satrix. It’s very competitive between those top three. The other eight issuers of ETFs and ETNs are much smaller. So we’ve got an industry dominated by three issuers, by three players, and that’s not a bad thing because you can have quite a lot of competition between three big companies, and that’s what’s happening.
During the course of 2021 up until the end of 2020 Absa has always been the biggest issuer of ETFs in South Africa, mainly because of their issues of NewGold, NewPlatinum and NewPalladium, the commodity ETFs. During the course of 2021 both Satrix and Sygnia overtook Absa and their focus is on foreign-referenced ETFs. If you want to buy an S&P here, an American ETF, if you want to buy a world ETF, if you want to buy an ETF listing, try these companies. That’s where Satrix and Sygnia come in. It’s great that they’ve managed to overtake Absa and they have a much broader band and range of ETFs to offer to the public.
SIMON BROWN: Overall a strong industry, a great-looking industry. We’ll leave it there. Mike Brown, managing director of etfSA, I appreciate your early morning time.
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