Page 158 - Profile's Unit Trusts & Collective Investments - March 2025

CHAPTER 8

Unit trust investors buy and sell at the
previous day’s “closing price” (ie, the Exchange Traded Notes
NAV unit price as calculated by the fund). (ETNs)
ETF investors trade at a market price Like an ETF, an Exchange Traded Note
determined by supply and demand (ETN) is an Exchange Traded Product
(although this is usually very close to (ETP). From the investor’s point of view, an ETN
NAV – see below). looks very much like an ETF: it typically tracks an
index, forex rate or commodity price, and it can be
ETFs allow large investors to “cash out”
traded on the stock exchange like a share. The key
or redeem an investment by taking a difference between ETFs and ETNs is that with ETNs
basket of shares in proportion to the ETFs the underlying assets do not belong to the investors.
holdings. Unit trusts can only repurchase Technically, an ETN is not a collective investment
units for cash. (This ability to “cash in” scheme but a debt instrument – a promise made by
ETF units for underlying shares creates an underwriting bank to pay to the holder of the ETN
arbitrage opportunities which ensure that an amount equivalent to the movement in the
reference index, rate or price, less fees. ETNs are
ETFs usually trade at NAV.)
therefore subject to credit risk (ie, the risk of default).
Settlement of ETFs in South Africa is via A major advantage of ETNs is that they offer retail
the JSE/STRATE settlement and clearing investors access to otherwise inaccessible asset
systems, which takes three business days. categories (such as specific commodities and
Unit trusts can usually be liquidated in 24 frontier markets). They also offer a low tracking error
to 48 hours, although the actual time (ie, the issuer undertakes to match the movement in
the underlying security, so that before the deduction
varies from one manager to another.
of fees the tracking error is zero).
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