Source: Exchange Traded Funds take ZSE by storm | Herald (Business)
Cornelius Mubi
Exchange Traded Funds (ETFs) have been the talk of the town since the listing of the Old Mutual Top Ten ETF in 2021 and even more so in 2022 when the Morgan & Co’s Multi-Sector ETF and the Datvest Modified Consumer Staples ETF added to the number of ETFs on the Zimbabwe Stock Exchange (ZSE).
Soon, another ETF namely, the Morgan & Co’s Made In Zimbabwe ETF is poised to list on the ZSE bringing the total number of ETFs on the local bourse to four.
ETFs are primarily separated by two characteristics: (i) the make-up of the underlying portfolio as well as the (ii) adopted investment strategy. Normally, the underlying portfolio of each ETF will vary according to the collection of investments it has such as equities, indices or any other asset class.
As such, each listed ETF is driven by different fundamentals and risks. Additionally, any given ETF can choose to implement an “active” or “passive” investment strategy.
Globally, the most common type of strategy used by ETFs is a passive investment strategy.
This means the fund manager tracks or mimics a given index. For instance, the Old Mutual Top Ten ETF tracks the ZSE Top Ten Index while the Datvest Modified Consumer Staples ETF tracks the ZSE Modified Consumer Staples Index.
Though exact tracking is often unfeasible, an index-tracking ETF will generally move in the same direction as its underlying index.
Another investment strategy used by ETF managers is known as active management. In this case, the fund manager frequently makes their own investment decisions regarding the underlying portfolio.
Consequently, active management removes the manager from the confines of an index and allows them to freely select and dispose of equities in the ETF.
The Morgan & Co Multi-Sector and Made In Zimbabwe ETFs are local examples of actively managed ETFs.
There is a general scepticism towards actively managed ETFs due to the unpredictability surrounding changes to the underlying basket of securities. However, the degree of unpredictability will depend on the issuer’s level of transparency relating to the ETF’s holdings.
Morgan & Co’s Multi-Sector ETF, for example, improves holdings visibility through the daily dissemination of the underlying portfolio to their clients, as well as on the company website.
Hence, investors can gain an understanding of the ETF’s strategic direction over time. Published research reports and notes also provide invaluable insights into the rationale of the fund’s chosen investments.
Overall, the performance of a passive ETF hinges on the performance of the underlying index being tracked, while the performance of an actively managed ETF hinges on the skillset of the manager.
In spite of these differences, ETFs offer investors direct access to a basket of securities through a single investment, making them highly cost-efficient and naturally diversified.
Nonetheless, investors are encouraged to carry out keen due diligence and seek investment advice from professionals before purchasing any listed financial asset.
Disclaimer
Information provided in this article is for educational purposes and does not constitute financial advice. You should obtain independent advice from a Registered Stockbroker or Financial Advisor before making any financial decisions.
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