JOHANNESBURG – Emergencies happen, but investors should restrain from using a tax-free savings account with the aim of withdrawing money after only a few years, as the real benefit of compounding in these accounts will occur in the very long term.
Speaking at a JSE Power Hour session, Simon Brown, founder of JustOneLap, said although investors have access to their money in these accounts at any point, withdrawals will weigh significantly on the compounding effect.
Tax-free savings accounts were launched on March 1 this year and allow individuals to invest up to R30 000 per annum. A capital contribution limit of R500 000 applies over the investor’s lifetime. All returns earned in these accounts (interest, dividends and capital growth) are 100% tax-free.
While National Treasury allows a variety of products within the accounts, including fixed deposits, unit trusts, certain endowments and structured products, Brown personally prefers exchange-traded funds (ETFs).
“To me a tax-free savings account in cash is a waste of a great vehicle to use.”
ETFs are attractive because it can provide superior performance in the long run at low costs, he argues.
Brown said since some of the ETFs track the same index, investors should compare fees. While a slight difference may seem insignificant, it will compound over the investor’s lifetime.
He said brokers have really come to the party in terms of fees. Strate (South Africa’s Central Securities Depository) has also reduced its fees for the tax-free savings accounts.
Brown invested R15 000 in the BettaBeta Equally Weighted Top40 ETF (BBET40) and the db x-trackers MSCI World Index ETF (DBXWD).
The BBET40 is the equally weighted Top40 index – the 40 largest shares on the JSE but held in equal proportions of 2.5%.
Brown said he prefers it to a “vanilla” Top40 ETF because the weighting of SABMiller and Naspers in the latter ETF is collectively around 22%. A vanilla Top40 ETF tracks the 40 largest companies on the JSE by market cap.
Both SABMiller and Naspers have been running hard in recent times and although this is not a bad place to be right now, he expects these two shares to underperform over the next decades and pull the index down.
Brown said the BBET40 has underperformed the Top40 because of the heavyweight exposure to SABMiller and Naspers in the latter index, but over time he expects BBET40 to provide a smoother and slightly better performance.
The DBXWD tracks the MSCI Worldwide index which consists of over 1 600 shares.
Brown said he previously disliked the ETF because of the large number of constituents and some of its exposure.
However, things have changed. Currently around 58% of the exposure is to the United States, 8% to the UK and 8% to Germany and France collectively.
Brown said with the US the powerhouse of the economy at the moment, he is comfortable with this exposure.
During a Twitter conversation someone also asked his views on the Grindrod PropTrax Ten (the name will change to CoreShares PropTrax Ten early next month). The ETF tracks the largest ten companies in the JSE Sapy (Property) Index, but are held in equal weightings of 10% each.
Brown said he likes the ETF (PTXTEN) and might add it to his tax-free savings account next year, but this year he didn’t buy property because it is expensive.
However, he also felt this way two years ago and since then the price rallied substantially, he said.
Ultimately, every investor will have different needs and should make their own choice, but the potential compounding benefits of these accounts over extended time periods shouldn’t be underestimated.
“Shop around for a provider who is offering what you like. Maybe you want vanilla, maybe you want structured, maybe you like cash and you want cash.
“Shop around for that provider that you like and shop around for the price that you like,” Brown said.