How to choose a Global Exchange Traded Fund

Investing in global exchange traded funds

No-one can claim investing offshore is easy. At end-2019, there were 2 800 companies listed on the New York Stock Exchange, including well-known giants like Apple, Amazon and Walmart, and 3 300 on Nasdaq. The London Stock Exchange boasted 2 055 listings and the Hong Kong Stock Exchange 2 315.

Those figures refer only to equities. The global menu also includes bonds, currency and commodity instruments as well as exchange-traded funds (ETFs) and exchange-traded notes (ETNs).

Ordinary investors in South Africa seeking global diversification for their portfolios are unlikely to be equipped to follow all of these markets and instruments. They would need to use advisers who are experts in each country, whose services may be too expensive for anyone with less than a few million rands to invest.

Buying an ETF is an easier way to unlock these global opportunities, but it requires an investor to make some educated decisions.

Why an ETF?

An ETF provides access, for as little as a few hundred rand, to a basket of shares or bonds that passively track an index. The lower the ETF’s tracking difference, the more closely it mimics the underlying index. Because the fund manager does not have to research and decide on what shares to buy and sell, ETF costs are typically lower than those of actively-managed unit trusts.

Although it represents a diversified portfolio, an ETF is not risk-free. Because of market volatility, short-term investments in bonds or equities could result in a capital loss. Any investment in bonds requires a 3-5 year time horizon and any investment in equities requires a 5-10 year horizon.

What kind of ETF?

It is possible to buy an international ETF that tracks a major index such as the S&P 500, the MSCI World Index or the World Global Bond Index. There are also global ETFs that track industries or sectors, such as technology, property or resources, or different currencies.

When investing in an ETF it is important to consider your portfolio holistically. For example, you may have conviction that technology shares will continue outperformance in the long term, but a portfolio that is entirely focused on the technology sector could underperform broader indices at times in the market cycle.

Rand, dollar or sterling?

South African investors can invest in rand-denominated ETFs that track global indices, both broad indices such as the MSCI World or the S&P 500 or more specialised sectors. A rand-denominated investment does not use the R1 million annual offshore allowance. However, when the investor sells ETF units, the proceeds must be paid out in rands.

Which asset manager?

Unless you already have a relationship with an asset manager you trust, it is usually better to choose one of the well-known investment names.

Ashburton Investments, a well-established global asset manager, offers two rand-denominated ETFs to South Africans.

The Ashburton Global 1200 Equity Exchange Traded Fund covers over 1 200 stocks, representing 70% of global market capitalisation. It is designed to track the performance of the S&P Global 1200 Composite Index. The fund offers investors exposure to emerging and developed markets across the US, Eurozone, Japan, Australia, Canada and Latin America.

The Ashburton World Government Bond Exchange Traded Fund tracks the FTSE World Government Bond Index (WGBI), which measures the performance of fixed-rate, local currency and investment grade sovereign bonds. It consists of countries that meet specific criteria for market size, credit quality, and barriers to entry. The WGBI is a widely-used benchmark that currently comprises sovereign debt from over twenty countries, including the US, UK, Canada, Germany, Japan, Australia and France.

Whatever your choice, a global ETF provides important diversification benefits for your long-term savings.