The Zimbabwe Stock Exchange (ZSE) will introduce Exchange Traded Funds (ETFs) as part of efforts by the domestic bourse to offer a wide of investment choices. Senior Business Reporter Martin Kadzere (MK) sought a detailed explanation from ZSE chief executive officer Mr Justin Bgoni (JB) about the new product, which he said is likely to hit the market during the second quarter of next year.
MK: Can you give us more insights about the new product and how it differs from ordinary stocks?
JB: Exchange Traded Funds are professionally managed, pooled and listed investment funds.
The investment fund typically invests in a basket of shares, currencies, commodities, bonds or other securities and investors buy units from the fund, which units are listed on an exchange.
This makes an ETF a basic derivative as the value of the units issued by the investment fund are dependent on the value of the shares, currencies, commodities or other securities in the basket.
Whilst ETF units are traded in the same manner as shares on an exchange, the difference is that ETF units track a basket of securities (an index), a commodity or a currency whilst a share tracks a single company. ETFs units generally offer more diversification benefits compared to shares.
MK: What's is the significance of the new product offering to the investing community?
JB: ETFs will increase the number of available investment options for the investment community. ETFs will also allow investors to get exposure to asset classes that are difficult to access directly, for example commodities.
Retail investors will also benefit from ETFs through the breaking down of large investments into smaller units that can then be bought and sold in the secondary market.
MK: What are the advantages of getting into ETFs when compared to stocks directly?
KB: An ETF will typically contain an assortment of stocks, for example a basket tracking the Top 10 ZSE Index. Investing in the ETF will provide an investor with exposure to 10 different stocks packaged in a single unit, which is more cost and time effective as opposed to purchasing the 10 different stock individually.
The investable indices are investor driven and issuers will be free to list ETFs focusing on different themes. The ZSE is, however, currently reviewing its indices with a focus to introduce relevant indices to the market. Some of the indices will be sector specific (eg consumer services and financial) and others will be size based (small, mid and large cap).
MK: Given the liquidity crisis prevailing in the economy, do you think the ETFs get positive response from the market?
JB: The ZSE believes there is sufficient liquidity in the market to support ETFs, based on the growth in money supply and the growth in investment in the market.
The RBZ July 2019 economic review indicated that broad money grew by 81,98 percent to US$17,08 billion in July 2019, from US$9,38 billion in July 2018.
Turnover on the ZSE totalled $1,49 billion for the nine months to September 2019, a 169 percent growth compared to the same period in 2018. The ZSE also continuously engages with investors and indications are that they require alternative investment options to the traditional stock.
MK: How safe are ETFs as an investment when it comes to factors like security?
JB: Stock exchange investments by nature are risky, in that there is no guarantee for positive return or preservation of capital. ETFs on listed securities however lower market risk for the investor through diversification as losses in a single stock are likely to be offset by gains in another stock within the ETF basket.
Listed ETFs are also safer compared to other non-listed investments as investors are assured that the issuers are regulated and expected to comply with best practices in terms of corporate governance and disclosure.
ETFs have enhanced disclosure requirements such as the daily publication of the net asset value of the fund to ensure the investors have a benchmark for valuation.
MK: How should one someone buying ETFs for the first time go about it?
JB: ETFs will be bought and sold in a similar way to common stock that is through registered stockbrokers. The investor should therefore get advice from their stockbroker or licensed financial advisor before investing.
MK: What are some of the drawbacks of opting for ETFs as an investment option?
JB: ETFs are generally passive investment strategies that seek to mimic an index or the performance of a single commodity or currency. Returns are therefore not expected to be higher than the tracked index, currency or commodity, which some active investment strategies may provide.