Exchange Traded Funds (ETFs) are amongst the fastest growing asset classes in Nigeria and are classified as collectives scheme.
The funds are a more recent asset class in Nigeria and are securities that track the performance of an index or basket of assets. There are about 12 listed ETFs on the Nigerian Exchange (NGX) Limited.
ETFs are a type of exchange-traded investment product that must register with the Securities Exchange Commission (SEC) under the 1940 Act as either an open-end investment company or a unit investment trust. Like mutual funds, ETFs offer investors a way to pool their money in a fund that makes investments in stocks, bonds, or other assets and, in return, to receive an interest in that investment pool.
Unlike mutual funds, however, ETF shares are traded on a national stock exchange and at market prices that may or may not be the same as the net asset value (NAV) of the shares, that is, the value of the ETF’s assets minus its liabilities divided by the number of shares outstanding.
There are things to consider before investing in ETFs. ETFs are not mutual funds. Generally, ETFs combine features of a mutual fund, which can be purchased or redeemed at the end of each trading day at its NAV per share, with the intraday trading feature of a closed-end fund, whose shares trade throughout the trading day at market prices.
Unlike with mutual fund shares, retail investors can only purchase and sell ETF shares in market transactions. That is, unlike mutual funds, ETFs do not sell individual shares directly to, or redeem their individual shares directly from, retail investors. Instead, ETF sponsors enter into contractual relationships with one or more financial institutions known as ‘Authorized Participants’. Authorized Participants typically are large broker-dealers. Only authorized participants are permitted to purchase and redeem shares directly from the ETF, and they can do so only in large aggregations or blocks (for example 50,000 ETF shares) commonly called ‘Creation Units’.
Other investors purchase and sell ETF shares in market transactions at market prices. An ETF’s market price typically will be more or less than the fund’s NAV per share. This is because the ETF’s market price fluctuates during the trading day as a result of a variety of factors, including the underlying prices of the ETF’s assets and the demand for the ETF, while the ETF’s NAV is the value of the ETF’s assets minus its liabilities, as calculated by the ETF at the end of each business day.
The NGX quarterly report for Q2, 2021 as of June 30, 2021 revealed that foreign transactions in gold-backed Exchange Traded Funds (ETFs) grew by 99.64 per cent, as 10 stockbrokers drove 99.9 per cent of total transaction value and 97.3 per cent of total volumes of ETFs in the second quarter (Q2) of 2021.
NewGold emerged as the most active ETF with its value rising by 99.6 per cent to N4.41 billion, taking the lead in both value and volume traded in the ETF space. The stock traded 524.241 units valued at N4.41billion. Vetiva Griffin 30 was next, trading 501,48 units worth N8.12 million, Vetiva Industrial Goods transacted 248,469 units worth N4.52 million, Meristem Value ETF sold 115,58 units valued at N1.87 million, while Stanbic IBTC ETF traded 19,774 units valued at N1.48 million.
Speaking on it, the managing director of HighCap Securities Limited, Mr David Adonri said that ETF is an investment fund or collective investment scheme which pools money from the investing public. The pool of funds from a scheme is used to collectively purchase asset(s) in which each investor own units.
He added ETFs are created from an underlying asset like gold or a basket of underlying securities designed to track an index. The funds have the same value as that of the underlying assets. ETFs are open-end funds, which means, they create and redeem units after they are initially issued. They issue new units as investors buy and retire units as investors sell or redeem.
He noted two main types of ETFs are traded on NGX, saying “They are commodity backed ETF like ABSA New Gold ETF and Index backed ETF like the Vetiva funds.”
According to Adonri, as a collective investment fund, it is designed to meet the investment diversification needs of retail investors who lack investment management capacity and large funds, also for other high net worth investors who have no time to manage their portfolios.
“ETFs are profitable investment outlets. They are tools for diversification of investment portfolios. Investors also benefit from economies of scale due to lower transaction cost enjoyed by funds.
“Essentially, ETF is meant to reduce nonsystematic risk associated with over concentration of investment because of diversification. However, they are still subject to systemic risk. If created from a commodity, it carries the risk borne by the asset.”
On the minimum amount to invest in ETFs, he said that “The minimum amount required to be invested varies and it depends on the price per unit of the fund. Generally, 100 units is standard for minimum purchase.
He added that “The ETF sector of the Nigerian Capital Market has been growing in leaps and bounds since the introduction of ABSA New Gold several years ago. It continues to attract various categories of investors whose goals are satisfied by ETFs. The prospects for ETFs remain very bright.
Like every other investment in both money and capital markets, it is important for an investor to engage a financial professional who will interrogate your objectives, risk appetite and style, guide you through the product options and assist you in setting up the required account.
It is also important to note that the liquidity for ETFs is a function of the underlying securities. You can buy the units of ETFs in line with the prescribed format by the managers and you can dispose of your investment whenever you wish in line with the policies that guide such at any point in time.
The Nigerian Stock Exchange which is a multi-asset exchange has made a considerable effort over the years in broadening its product range and it is important that investors are aware of this and tap into the varied opportunities that the market offers.