SIMON BROWN: The ABC of ETFs
Investing in exchange traded funds is great — but be sure to know what you hold, why you hold it and how it fits into your portfolio
Exchange traded funds (ETFs) are awesome. I bought my first one in the IPO for the Satrix 40 more than 20 years ago and still hold it, having added many others along the way. There was a period when every new, shiny ETF seemed excellent and I’d buy it, and I ended up holding a couple of dozen different ones before finally cleaning up my portfolio.
The point is that while ETFs are the best thing to happen to investing since investing began, you need to know what you hold, why you hold them and how they fit into your portfolio.
Start with how they fit into your portfolio, as this really is the first step — portfolio construction. Almost two-thirds of my portfolio is made up of ETFs, and I favour a broad range of diverse global ETFs. There are many on offer on the JSE and they mostly have small differences, but for me broader is better. The total expense ratio (TER) is also important. When comparing two that are largely the same (or in some cases exactly the same), always spring for the one with a lower TER.
I then add some flavour to my diverse global ETFs, and here it’s important why you hold them. I am talking about smaller tactical positions. Maybe you want some extra tech exposure, emerging markets or commodities. You need to have a strong conviction and often a strong stomach, because the more niche ETFs will often have more volatility than others.
As for why you hold them, take tech, for example. It accounts for about a quarter of most diverse global ETFs. Do you need more? If you’re sure you do, that’s perfect. However, always avoid buying just because it’s hitting highs and you have fomo.
These tactical positions need to be given time to really mature, but it’s also important that you have an exit plan. When do you ditch the position? Will that decision be time based or price based, or will you do it when the story starts to fade? For me, it’s about the story. Tech is an easy one here, but others, such as emerging markets, may have a compelling start but poor returns. China is another of which the story seems great, yet it has failed to deliver.
Last, what do you really hold? I remember that way back in the early days of local ETFs there was a green ETF, but it was full of old-school miners because they ticked the right boxes. I’d bought it for my sister’s account and she was horrified when we discovered what it really held. We’d both assumed it would be green renewable energy and the like, but we hadn’t checked. A name is just marketing. You need to look into the details.
To end: fewer is generally better with ETFs. If we hold too many, we just get the average, in which case we can save ourselves the time and effort and just buy a diverse global ETF — which, for most ETF investors, is absolutely the right solution.