In terms of new ETF listings, 2017 has been a dream year. However, the principle at the heart of index investing – buying the market as cheaply as possible – doesn’t apply to some of the unconventional ETFs listed this year.
The rising number of smart ETFs require a more active selection process. The Dollar and Krugerrand Custodial Certificates, the 4th Industrial Revolution, the Africa and emerging markets ETFs and even the quality ETF mean investors have to think about much more than TER when making an investment decision.
Here are four questions to help you decide whether you should include a newly-listed ETF in your portfolio.
- Is the ETF for my tax-free portfolio?
It’s an excellent idea to invest your first R33 000 in a tax-free investment vehicle. As the name implies, you pay no dividend withholding or capital gains tax on these investments. These products have annual and lifetime investment limits designed to help you stay invested for longer.
While these investment vehicles are ideally suited to ETF investments, commodity ETFs and international bond ETFs aren’t accessible within the tax-free savings space. The following ETFs are excluded from tax-free investment vehicles:
- AfricaGold ETF (ETFGLD)
- AfricaPalladium ETF (ETFPLD)
- AfricaPlatinum ETF (ETFPLT)
- AfricaRhodium ETF (ETFRHO)
- NewGold ETF (GLD)
- Krugerrand Custodial Certificate (KCCGLD)
- NewPalladium ETF (NGPLD)
- NewPlat ETF (NGPLT)
- Dollar Custodial Certificate – 10 Year (DCCUSD)
- Dollar Custodial Certificate – 2 Year (DCCUS2)Do I understand how adding this ETF affects my risk profile?
Asset classes that are more risky due to fluctuations in price promise greater returns in the long run. Shares and property fall into this category. When considering an offshore ETF, remember the currency conversion adds more volatility, and therefore risk, to your portfolio. These assets are best suited to long-term portfolios that have enough time to absorb price movements.
Don’t forget to take the holdings within your pension fund or retirement annuity into consideration when choosing which ETFs to add to your portfolio.
- Do I understand the correlation between price and performance?
Remember that you have to subtract the cost of the ETF from the returns to get to your true performance for the year. Because smart ETFs sometimes require more frequent rebalancing, they can be more expensive than their vanilla counterparts. Your smart ETF needs to outperform the market by at least the cost of the ETF. Ideally, however, you’d want to maximise the difference between cost and performance – especially if you’ve taken on more risk.
- What do I want the ETF to do in my portfolio?
If your aim is to create long-term wealth, cheap, market-hugging ETFs are the way to go. If, however, you have additional disposable income, a higher risk appetite and a desire to attempt beating the market, smart ETFs are a great vehicle. It’s important to allocate resources for each without losing sight of your long-term wealth-building goals.
Click here to meet the Just One Lap team at one of our live, free events.