Last week Sygnia announced that it had reached an agreement to acquire the db x-trackers exchange-traded funds (ETFs) from Deutsche Bank. The listed asset manager said that the deal was worth R320 million.
The news raised a number of eyebrows in the industry because while Sygnia has been a vocal proponent of index tracking, it has been critical of South Africa’s ETF industry. The company has consistently argued that ETFs do not offer a cost effective way to access the market.
However, Sygnia’s CEO, Magda Wierzycka, says that this deal is not an indication that she’s changed her mind.
“What I’ve been very critical of in the South African context is the cost of access,” Wierzycka says. “ETF management fees themselves are quite reasonable, but for an investor to invest in one you are looking at trading costs, stockbroking commission, bid-offer spreads, and the cost of investment plans, which all add another layer of cost. When you start adding all of these together, the fee is commensurate with an actively-managed unit trust.”
She says that Sygnia’s aim will be to reduce and even eliminate these fees for accessing ETFs, and offer them in as raw a form as possible.
“The annual fees on investment plans currently range from 0.7% to 1.0% per annum,” Wierzycka says. “We want to place these ETFs on our platform as close to no cost as possible. The stockbroking through Sygnia Securities will also be minimal – below 10 basis points.”
While this argument is persuasive, Sygnia will have to compete with platforms that already offer extremely low cost access to ETFs. Absa Stockbrokers, Easy Equities and SatrixNOW already offer discounted brokerage on ETFs and no annual fees.
In this market, Sygnia will have to find a way to differentiate itself.
Wierzycka believes that there is also scope to bring down the trading costs of ETFs through engaging with the JSE. In addition, Sygnia plans to speak to international market makers that could narrow the bid-offer spreads.
With competition coming to the stock exchange industry in South Africa, Wierzycka suggests that there may also be the opportunity to look at alternative listings.
“It will boil down to fees,” she says. “If other exchanges can offer these products and are willing to list them at lower cost then either the JSE will have to come to the party or we will look at the alternatives.”
An immediate challenge that Sygnia will face, however, is that the db x-trackers products are currently the most expensive ETFs on the JSE. Although their fees do work on a sliding scale, their initial total expense ratios (TERs) of 0.85% are nearly double those of the only other foreign ETFs listed on the local market managed by CoreShares.
These will almost certainly have to come down if Sygnia wants to continue to claim that low costs are at the core of its value proposition. It will also have to ensure that any new products it introduces will carry much lower fees.
“We would like to launch international bond and international listed property ETFs, as well as one that tracks our 4th Industrial Revolution Global Equity Fund,” Wierzycka says. “Then potentially we will start looking at the domestic market and might also launch some smart beta funds, for instance the Sygnia Skeleton funds wrapped in ETF structure.”
Wierzycka adds that once the deal is finalised, the company will be re-branding the current suite of db x-trackers ETFs to Sygnia Itrix, and will use that name going forward.