Page 158 - Profiles's Unit Trusts & Collective Investments - September 2024

CHAPTER 8

always visible and transparent. Unit
trusts effectively only trade once a day Exchange Traded Notes
after the market closes. (ETNs)
Unit trust investors buy and sell at the Like an ETF, an Exchange Traded Note
previous day’s “closing price” (ie, the (ETN) is an Exchange Traded Product
NAV unit price as calculated by the fund). (ETP). From the investor’s point of view, an ETN
ETF investors trade at a market price looks very much like an ETF: it typically tracks an
determined by supply and demand index, forex rate or commodity price, and it can be
(although this is usually very close to traded on the stock exchange like a share. The key
difference between ETFs and ETNs is that with ETNs
NAV – see below).
the underlying assets do not belong to the investors.
ETFs allow large investors to “cash out”
Technically, an ETN is not a collective investment
or redeem an investment by taking a scheme but a debt instrument – a promise made by
basket of shares in proportion to the ETFs an underwriting bank to pay to the holder of the ETN
holdings. Unit trusts can only repurchase an amount equivalent to the movement in the
units for cash. (This ability to “cash in” reference index, rate or price, less fees. ETNs are
ETF units for underlying shares creates therefore subject to credit risk (ie, the risk of default).
arbitrage opportunities which ensure that A major advantage of ETNs is that they offer retail
investors access to otherwise inaccessible asset
ETFs usually trade at NAV.)
categories (such as specific commodities and
Settlement of ETFs in South Africa is via frontier markets). They also offer a low tracking error
the JSE/STRATE settlement and clearing (ie, the issuer undertakes to match the movement in
systems, which takes three business days. the underlying security, so that before the deduction
Unit trusts can usually be liquidated in 24 of fees the tracking error is zero).
to 48 hours, although the actual time
varies from one manager to another.
Both ETFs and unit trust index funds, as collective investment schemes, must publish NAV prices on
a daily basis. The JSE does allow ETFs to trade directly with clients for large orders. In this case, the
transaction must be done at the NAV price, as per the CISCA rules.
Arbitrage ensures that ETFs trade very close to NAV. In the event of a mispricing (ie, a
discrepancy between the NAV of the ETF and the market price):
investors may swap an ETF for a physical basket of shares, which can then be traded in the
market to take advantage of the mispricing;
investors may arbitrage between the market (spot) price of the ETF and the futures contract
on the index. (SAFEX, the futures market and SETS, the spot equities market, operate on
the same JSE trading platform, which facilitates this type of trade.)
In addition, official market makers are appointed by the ETF managers to provide market
liquidity and to ensure that the ETFs trade at or close to fair value (NAV).
From a cost point of view, ETFs and unit trust funds compete directly with each other, and this
is reflected in their competitive pricing structures. As with most CIS products, the final cost to the
investor depends on various factors. In general, for the retail investor, ETFs bought via a
stockbroker are cheaper than buying unit trust index funds directly from a CIS manager, but a unit
trust index fund bought through a LISP offering zero or low initial charges may be cheaper than
brokerage fees on purchase of an ETF. Annual service fees also differ depending on the purchase
route (see fund fact sheets).
Some ETFs offer “investment plans” which allow retail investors to invest in a fund via a
monthly debit order.
These investment plans are typically outsourced and have an additional layer of costs specific to
the investment plan investor (ie, in addition to the fees charged by the fund). So, for example, an
annual fee of between 0.575% and 0.345% (based on a sliding scale) of the total amount invested
is charged by the Satrix investment plan. This fee would not be payable if the investment was made
via the JSE (through a stockbroker), but then stockbrokers do not offer the convenience of monthly
debit orders.

156 Profile’s Unit Trusts & Collective Investments — Understanding Unit Trusts