Exchange Traded Funds

Mitigating Your Risks With Exchange Traded Funds

It is probable that the expected return from an investment  differs from the actual return. The investor has to contend with two major types of risks-diversifiable and non-diversifiable risk. Some risks cannot be diversified away by holding a portfolio of investments. The investor still has to face the risk associated with the whole economy e.g. exchange rate, interest rate, environmental, legal and inflationary risks. But it behooves the investor to avoid the security-specific risks by holding a diversified portfolio of securities. But oftentimes it is expensive for the investor to hold a diversified portfolio of investments. Exchange Traded Funds (ETFs), like mutual funds, can do the magic. But unlike mutual fund, they may trade at a discount or premium to their Net Assets Value (NAV) per share. NAV is total assets minus liabilities.

With ETFs the investor is afforded the opportunity of owning part of a portfolio managed by an experienced fund manager for a fee. An ETF could be designed to track equities, government bonds or corporate bonds.  The fund manager aims to replicate the performance of an index by holding a portfolio that is a typical representative of the constituent securities of the tracked index such as S & P 500, Nikkei 225 and DAX.  For ETF that tracks a stock market index, it can hold all the shares or a sample of a stock index or target a specific sector of the stock market.

ETFs are not constantly traded by the fund managers to take advantage of daily movement of the indices. Therefore, the expense ratio of an ETF is often lower than that of an actively managed portfolio of investments. However, they are reappraised at regular time intervals to reflect changes in the composition and weighting of the securities in the benchmark index. ETFs are actively traded on the stock exchange like other stocks or bonds and can be obtained through the stockbrokers.

An astute investor can benefit from investing in ETFs in Nigeria.The fundamentals of the Nigerian economy remain strong.  Many stocks are trading at a hefty  discounts to their intrinsic values. Unitholders of ETFs are usually exempted from paying taxes on the dividends they receive and capital appreciation upon disposal.

LOTUS HALAL EQUITY ETF
It was listed on 14th November 2014 to track the NSE Lotus Islamic Index(NSE LII) of the Nigerian Stock Exchange. NSE LII comprises 15 Shari’ah compliant stocks from five sectors of consumer goods, industrial goods, healthcare, agriculture, oil and gas. It is reviewed periodically in order to ensure that component stocks continue to comply with Islamic principles. Distillers/brewers, tobacco companies, non-islamic banking companies are excluded. It comprises large-cap companies like Dangote Cement, Nestle, Mobil, Dangote Sugar, Mobil ,etc.

Investors have the opportunity to invest without compromising their religious beliefs. The All Share Index (ASI) of the Nigerian Stock Exchange has lost 16% year-on-year while the NSE LII  lost 8.3%. It is managed by Lotus Capital Limited.

NEWGOLD EXCHANGE TRADED FUND (ETF)
NewGold was launched on the Johannesburg Stock Exchange in 2004 to track the Rand (SA) price of gold.  It was listed on the Nigerian Stock Exchange in December 2011. Gold is a safe haven in a period of  economic uncertainties  and might be part of the investors’ diversification strategy. Investing regularly will help you average out your cost (Naira-cost averaging ).It allows the investor to profit from gold price appreciation without having to take physical delivery of gold.Gold Exchange Traded Funds  make investing in gold affordable for retail investors. Each security of NewGold is about one-hundredth   ounce of real gold held in the vault of the custodian, Brinks Limited.

THE SIAML PENSION ETF 40
The SIAML PENSION ETF was admitted to the daily official list of the NSE in January 2017. It is an open-ended ETF modelled after the NSE Pension 40 Index which is made up of the top 40 most capitalised and liquid companies. To warrant inclusion in the NSE Pension 40 index, the equity must comply with the requirements of the National  Pension Commission  ( Nigeria)  which prohibits  Pension Fund Administrator  from investing in securities issued directly by it or its pension fund custodian or indirectly by its shareholders or shareholders of its custodian.

The ETF is managed by Stanbic IBTC Asset Management Limited.

STANBIC IBTC ETF 30
It is an exchange traded fund registered with the Nigerian Stock exchange and managed by Stanbic  IBTC Asset Managemnt Limited. It aims to duplicate the yield of the NSE 30 Index by investing in the same portfolio of securities in proportion to their weighting in the index. The  fund gives the investor the opportunity to invest in liquid securities as captured in the NSE 30 Index.

The fund earns dividends and may distribute its net earnings to unitholders or reinvest in the business.

VETIVA GRIFFIN 30 ETF
It was liisted on 14th March 2014 and managed by VETIVA Fund Managers Limited to copy the performance of NSE 30 Index. A unit of the fund entitles the holder to one-hundredth of the value of the NSE 30 Index. It is held in trust by Union Trustees Limited on behalf of the unitholders who have the option of selling their holdings on the exchange or taking delivery of their shares as agreed with the fund manager subject to minimum value thresholds.

THE VETIVA SECTOR SERIES ETFS
These sector-focused equity ETFs that are registered on the Nigerian Stock Exchange in October, 2015.Vetiva Banking ETF  is designed to duplicate the performance of the NSE Banking Index which composes the 10 most capitalised and liquid banks quoted on the Nigerian Stock Exchange. These are Access Bank, Diamond Bank, ETI, Fidelity Bank, Guaranty Trust Bank, Sterling Bank, Union Bank, UBA, Wema Bank and Zenith Bank.

Vetiva Consumer Goods ETF tracks the NSE Consumer Goods Index which  tracks the top 15 companies in food and beverage sectors. Vetiva Industrial ETF attempts to copy the yield and price of the NSE Industrial Index. The top 10 companies in the industrial sector are the constituents of this index.

VETIVA S & P NIGERIA SOVEREIGN BOND ETF
It was registered with NSE in October, 2016 to  generate a return similar to that produced by the S&P Nigeria Sovereign Bond Index.  It  enables investors to benefit from  Federal Government of Nigeria Bonds.The S&P Nigeria Sovereign Bond Index tracks the performance of local currency denominated sovereign debt publicly issued by the government of Nigeria in its domestic market.