New Telegraph

Evaluating ETFs as investment option

CHRIS UGWU in this report examines the benefits of Exchange Traded Funds (ETFs) as an alternative investment window in view of recent market downturn

 

A crucial part of the current problem with the capital market is its shallowness and lack of breadth. Currently, less than 30 per cent of listed equities are actively traded, while the NSE offers only basic products.

 

There have been arguments, though, to the effect that the NSE’s product offering has only reflected the domestic economy’s financing needs. However, on account of the economy’s radically changing financing needs, including recourse to the public private partnership (PPP) arrangement as a solution to the nation’s infrastructure deficit, finance experts are of the opinion that opportunities should now abound for broadening the exchange’s product offerings to include key derivative categories, expansion of listed mutual funds, index funds, among others.

 

In an effort to strengthen the Nigerian Stock Exchange and make it compete favourably with other exchanges across the globe, some experts have at various fora called on the regulators to create more products that will broaden, deepen and inject liquidity into the market.

 

In pursuit of its drive to deepen the stock market, the Nigerian Stock Exchange in partnership with some fund managers recently trained market operators on how to leverage the Exchange Traded Funds (ETFs) as an alternative investment platform.

 

The training was organised to create awareness of the product, address its challenges and promote its opportunities in Nigeria and Africa. What are Exchange Traded Funds?

 

An ETF is an investment vehicle traded on a stock exchange, more like shares. Most ETFs are passively managed index funds, which normally track an index, with their main objective being to participate in the economic growth of an industry, sector or commodity.

 

ETFs provide the attraction of the returns of a traditional tracker fund (like unit trusts) with the liquidity of a listed security. ETFs are traded at prevailing market prices, which are approximately the same    price as the Net Asset Value (NAV) of their underlying assets over the course of the trading day. Individual investors should view ETFs as core, long-term investments.

 

In the beginning Fortuitously, the capital market presents several other investment opportunities that also deliver competitive returns, while offering diversification and a degree of security. In 2011, the NSE introduced Exchange Traded Funds (ETFs) into the market to allow retail investors to diversify their portfolio, minimise risk and optimise returns. Much like mutual funds, ETFs can be made up of stocks, bonds, commodities, or even a mix of securities.

 

The fundamental difference is that ETFs can be traded live on The Exchange just like regular stocks. As at 2019, there are nine ETFs listed on the Exchange – 2 thematic ETFs providing access to pensioncompliant and shariah-compliant stocks, 2 broad equity market ETFs tracking the NSE 30 Index, 3 sectorbased ETFs, 1 commodity ETF, and 1 bond ETF tracking exposure to benchmark FGN Sovereign Bonds.

 

The beauty of the ETF, therefore, lies in its capacity to accommodate various risk appetites, investment objectives and strategies, and industry preferences. Furthermore, ETFs listed on the Exchange have a history of paying dividends which generates income for the investor.

 

The diversity and accessibility in today’s capital market also affords investors the option of fixed income investments. In 2017, the Debt Management Office in collaboration with the NSE introduced the FGN Savings Bond allowing investors to come into the market with as little as N5,000.

 

This product has helped to debunk the primary myth that investing is the preserve of the affluent by opening up the market to all income classes. The FGN Savings Bond can also be traded in the Secondary Market on the trading platform of The NSE.

 

To truly enjoy the benefits of the capital market, investors – existing and potential – must be strategic in building strong portfolios that deliver gains in the long run. While equities often present the highest  potential for gains, investors in this market must have a long-term view to maximise returns. It is, therefore, essential that investors explore other safer investment instruments such as ETFs, bonds, mutual funds, etc., which are all available in the market.

 

Performance of ETFs in 2020

The NSE Exchange Traded Fund (ETF) market experienced its best year. The Chief Executive Officer of the Nigerian Stock Exchange (NSE) at the 2020 Market Recap and 2021 Outlook disclosed that the market capitalisation increased by 272.30 per cent from N6.58 billion recorded in 2019 to N24.51 billion in 2020 while trade volumes increased by 218.23 per cent from 4.15 million units in 2019 to 13.20 million units in 2020, and turnover skyrocketed by 51,830.59 per cent.

 

“These achievements can be attributed to several factors including: growing adoption of the asset class by investors and asset managers on the back of strong year on year growth; launch of two new ETFs – Meristem Growth ETF and Meristem Value ETF by Meristem Wealth Management Limited which track the NSE Meristem Growth Index and NSE Meristem Value Index respectively; and unattractive yields in the fixed income market which led investors to seek alternative asset classes as also experienced in the equity market

 

“The NEWGOLD ETF, which tracks the price of gold and offers investors the opportunity to invest in a listed instrument that is backed by a gold bullion and serves as a good currency hedge, was the best performing ETF for the second year running as it returned 66.03 per cent in 2020, reflecting investors’ continued preference for riskbacked securities.

 

ETFs designed to give shareholders investment option With the growing demand for cost-effective, low-risk, diversified and income generating investment instruments, the exchange identified the ETFs segment as a viable investment option for investors, particularly younger players who are new to the capital market.

 

Onyema said this recently when the Nigerian Stock Exchange hosted capital market stakeholders and members of the investing public to a Smart Investment Workshop in Lagos.

 

The workshop themed, “Using Exchange Traded Funds (ETFs) as a Proxy for Investing in Nigerian Equities,” was hosted in partnership with Meristem Wealth Management Limited and had in attendance young members of the investing public and capital market stakeholders. The exchange said the workshop was held in line with its commitments to deepen capital market activity through innovative and value-driven products and services, as well as provide opportunities for in-depth investor education.

 

Speaking on the growth of the ETFs market segment, Onyema said: “Today, the NSE is the second largest ETF market in Africa with a current market capitalisation of N6.9 billion.

 

From a single ETF tracking the price of Gold in 2011, the market has deepened with 10 ETFs currently offering exposure to equities, fixed income, commodities as well as thematic and smart investment solutions. The ETFs market segment is radically reshaping the asset-management industry; gradually eclipsing old-fashioned stock pickers given its ability to replicate passive investing styles.

 

“With the market witnessing low yields, we have seen an increasing appetite for equities, and ETFs present investors with an alternative channel to maximise investment and minimise the risk that comes with investing in equities. Consequently, the exchange is resolute in its goal to collaborate with market stakeholders to not only increase listed ETFs, but also provide the necessary sensitisation and capacity building that will boost activity in the market.”

 

In his presentation at the workshop, Head, Asset Management, Meristem Wealth Management, Mr. Taiwo Yusuf, noted that ETFs were inherently designed to give investors access to a wide range of viable assets. He stated: “By investing in ETFs, investors are free from the rigors that come with trading in equities including: stock valuation, screening, selection and liquidity risk.

 

This makes ETFs a more costeffective investment solution. In addition, ETFs serve as a bespoke product for investors who want to add a tinge of innovation to their investment portfolios.”

 

Following the deliberations of the day, three winners emerged in an online quiz to test participants’ knowledge of the ETFs market. In the first place, Sulyman Sulyman won N75,000 worth of investment in ETFs courtesy Meristem Nigeria, as announced by Managing Director, Meristem Wealth Management Nigeria, Mr. Sulaimon Adedokun and a goody bag from NSE. Second place winner, Harding Udoh, was gifted with N50,000 worth of investment in ETFs and a goody bag both from NSE; while the third place winner, Oludipe Abisoye, won N25,000 worth of investment in ETFs, courtesy of Meristems Nigeria and a goody bag from NSE.

 

Last line

 

ETFs are essential in markets with a significant low product to investor ratio like the Nigerian Stock Exchange. However, the regulators and fund managers have key roles to play in ensuring the right products are introduced to the market and that product proliferation does not lead to abuse.

Read Previous

NPA forces liners to use holding bay for empty containers

Read Next

AfCFTA: ‘Non-African goods won’t enjoy preferential treatment

Leave a Reply

Your email address will not be published. Required fields are marked *