Podcast: Offshore ETFs and the rand

In Latest, The Fat Wallet by Kristia van Heerden

fw_161219When you buy a locally-listed ETF based in another currency, two transactions happen in the background. First, your rands are converted to the other currency. The new currency is then used to buy the ETF units. Buying an ETF based in a different currency is therefore an easy way to introduce currency diversification into your portfolio

In this episode we help you understand the impact of these two transactions on your portfolio when there’s currency movement. If, for example, you bought a dollar-based ETF and the rand weakens against the dollar, do you have more money or less money?

We explore hedging and why this strategy might be seen as a currency hedge. If you’re looking at offshore ETFs for your portfolio, you don’t want to miss this episode.


The bleeped show is below:


Tony 

If you invest in an ETF like the SP500, does this give you protection against the value of the rand? Does the value of the ETF adjust along with the value of the rand?

If yes, how does this process work? Are there any dollar based ETFs in SA that can be used in a tax free account?


Win of the week: Boitomelo

Thank you so much for your good content that has allowed most of us to make life-changing financial decisions. I cannot thank you enough. 

Are you guys not able to have a Patreon account where those who wish to contribute to your content can do so? 


Carel 

I guess it goes without saying that any negative credit events would be tied to each of our names. If we get the bond in our own names, we (and not the business) would own the property.

If we try to have the business receive the rent as income on a property we own in our own names (if such a thing is in any way even possible), SARS could see this as some kind of attempt at tax evasion? As I mentioned before – only completely above-board practices would suffice. 

If we purchase the property in our own names, we could each be held fully liable for the full amount, then it would be up to the person held liable to take the other to court to recoup the balance.


Brendan

If I were to start now, with mayhem in the market, are ETFs cheaper / a great price right now, or is there anticipation of an even bigger dip, creating even better buying power?

I’m specifically looking at Satrix MSCI / Top 40, Asburton Global 1200 and Sygnia MSCI World.

To confuse the question even more, is there some kind of daily / weekly ‘tracking number’ – to gauge if ETFs are getting more affordable?


Gerhard

I discovered dividends aren’t taxed at all when shares are held in a company. However, capital gains tax is 28% on 80% of your capital gains, which is quite high. 

I have a small company from which I pay myself a salary. From time to time I have a bit of extra money in this company.

I’ve been buying ETFs in the company: 40% local equity (Coreshares top 50), 40% world equity (MSCI World); 10% Global property and 10% local property.

This was before I knew about the free dividends. Now I’m thinking I should buy whatever pays the highest possible dividend – without undue capital risk and definitely not property because the distributions are taxed as income.

In my mind I should probably be buying the: PREFTRAX

Do you think I should sell the above ETFs and move it all over to PrefTrax or whatever else might be better? 


Jarrett

I am 31 and based in Kuwait, which offers great earning and saving potential. 

How do I best use this money? My first investment was in property back in South Africa, which is paying for itself. I was looking to invest in a second property this year. However, some friends in the finance game suggested this was not such a great idea. They recommended I diversify investments and look into ETFs specifically.

  1. Would you suggest trying to open up an account with an international broker, such as interactive brokers, or rather stay with a South African-based company? I have bank accounts in both SA and Kuwait, does that have any impact? 
  2. I have a fair amount of money saved up, just sitting there (I know, not great). Honestly, I don’t really have the knowledge to know what to do with it. Apart from ETFs, what other options should I be looking at? 

Ben

Like you, I’ve been investing in the Ashburton 1200. With the rand weakening quite a bit in the last while, and the S&P not really weakening that much, I was wondering if there might be other investment opportunities that are more opportunistic? 

If my thinking is correct, a stronger rand or weakening economy is good for buying (with potentially more growth), but it feels like buying 1200 now is a bit meh because the rand should strengthen and the 1200’s price will go up, which would leave me not really winning. 


Hans

The fund tracks the S&P South Africa Composite Property Capped index, which is described as tracking all funds in the S&P South Africa Composite index that are classed as property.  This means that if one REIT in this fund goes bust, there’s nothing replacing it.

What happens to the fund?  Does the NAV drop and the fund price drop accordingly?  Do the investors just eat the loss?


Jonathan

I have an under-performing unit trust which has only gained 3.7% after fees with momentum since 2012 before the crash. It’s now -12%. It’s not my RA, but it’s invested into a lot of RA-like products ie. only 30% international equity.

Conversely, I have an EE account with SYG500. Before the crash it was returning 7-8%, including currency movement. Its maximum before the crash was 12% but it’s currently -10%. (This was on 24 March. 23 March was the bottom for the SP500).

I’m currently 36 so I can deal with the volatility. I would like to increase my offshore exposure. I already have a fairly-sized RA to give me more than enough local or EM exposure.

During this downturn, should one consider accepting losses in loss-making accounts, sell and transfer them to another account that has future growth prospects far healthier? In other words, move from balanced funds to ETFs? From expensive 2.4% to cheaper 0.2%?

I’ll take a heavy hit at -12% on momentum, but the pros are that I buy SYG500 at -10% and pay less CGT on selling the momentum as well. Plus of course, I pay less ongoing fees (2.5% versus 0.9%).


Stiaan

I’ve been investing in a tax free savings account the past three years at Investec (managed by Anchor Capital). The growth was extremely low! After listening to your show I wanted to move that TFSA to ETFs. 

I made the move in January, but struggled a lot with moving the money. It transferred in the beginning of March just before the crash. I see this as a great opportunity to buy. I moved the money to the Satrix platform and I am curious what would be the best ETFs to buy at this time?

My other investments include:

* A retirement annuity with Alan Gray

* A property I rent out (financed with a home loan)


Jessica wants to know how Patrick managed to invest in the Vanguard World ETF.


Tafadzwa

I finally started investing in US ETFs on the 9th of March 2020, just as the bottom was falling out of global markets. I was tempted to wait for a further drop but later decided that it’s a fool’s game. 

Like you guys said, the moment when you place your first buy order was scary. Having a couple of demo accounts in the past few months helped a lot. 

I plan on investing in:

  • Vanguard Dividend Appreciation ETF VIG 20%, 
  • Vanguard Growth ETF VUG 30%, 
  • Vanguard Information Technology ETF VGT 30%, 
  • Prime Mobile Payments ETF IPAY 8%, 
  • VanEck Vectors Semiconductors ETF SMH 8%, and 
  • iShares MSCI Real Estate Index ETF FREL 4%. 

I started with VIG 20%, VUG 30%,VGT 40%, and IPAY 10%. 

I am aware of the overlap and concentration risk between some of the ETFs and can live with that. It’s great investing with TD Ameritrade because ETF trades have zero commission!

I’ve been thinking about complexity vs simplicity vs chasing returns. Is this portfolio too complex? Is it still truly a passive strategy or am I making active decisions in a passive space? 

I have also been considering having this core of ETFs complemented by single stocks capped at 20% of total portfolio value. I have about 10 single stocks in my watch list which I really like but am hesitant to take the plunge. I have the stocks already in my ETFs in small percentages but would like more exposure to them. This would make my portfolio a strange mix of passive and active, which would require me to rewrite my initial financial plan. 

What do you guys think? Is investing in single stocks evil? I am considering breaking the rules and trying to beat the market, but from a foundation of ETFs. 


The Fat Wallet Show with Kristia van HeerdenThe Fat Wallet Show is a no-nonsense personal finance and investment podcast hosted by Kristia van Heerden and Simon Brown. Every week we answer questions by a growing audience of finance enthusiasts. Submit your pressing money and investment questions to ask@justonelap.com.

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