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Dec 27, 2023

Exchange Traded Funds – Some Practical Insights

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The popularity of certain sectors and thematic ideas for Exchange Traded Fund investors fluctuates based on market trends, current events, and investor sentiment. Here are some of the currently popular options:

Popular Exchange Traded Fund Sectors:

  • Technology: Exchange Traded Funds focused on tech giants, cloud computing, cybersecurity, or specific niches like semiconductors or fintech are popular due to the continued digital transformation across industries. Here are some technology related Exchange Traded Funds worth considering:
    • SPDR S&P Semiconductor Exchange Traded Fund (XSD)
    • ARK Innovation Exchange Traded Fund (ARKK)
    • Global X Cloud Computing Exchange Traded Fund (CLOU)
  • Healthcare: With an aging population and rising healthcare costs, Exchange Traded Funds covering pharmaceuticals, biotechnology, medical devices, or healthcare providers hold steady appeal. Here are some healthcare Exchange Traded Funds for consideration:
    • SPDR S&P Biotech Exchange Traded Fund (XBI)
    • iShares Global Healthcare Exchange Traded Fund (IEHG)
    • Vanguard Health Care Exchange Traded Fund (VHT)
  • Consumer Staples: These Exchange Traded Funds offer defensive exposure to essential goods and services like food, beverages, and household products, providing stability during market downturns. Here are some consumer related Exchange Traded Funds:
    • Consumer Staples Select Sector SPDR Fund (XLP)
    • Vanguard Consumer Staples Exchange Traded Fund (VDC)
    • iShares Global Staples Exchange Traded Fund (STAP)
  • Renewable Energy: The transition to clean energy sources fuels demand for Exchange Traded Funds covering solar, wind, electric vehicles, and clean technology companies. Here are a few renewable energy Exchange Traded Funds:
  • Renewable Energy:
    • iShares Global Clean Energy Exchange Traded Fund (ICLN)
    • Invesco Solar Exchange Traded Fund (TAN)
    • SPDR S&P Kensho Clean Energy Exchange Traded Fund (CNRG)
  • Financials: Although facing headwinds, Exchange Traded Funds focusing on established banks, financial technology companies, or specific regional markets can still be relevant for some investors. Here are some financial Exchange Traded Funds worth considering?
    • Financial Select Sector SPDR Fund (XLF)
    • SPDR S&P Regional Banks Exchange Traded Fund (KBE)
    • FinTech Select Industry SPDR Fund (FINX)

Exchange Traded Funds Thematic Ideas:

  • Climate Change: Exchange Traded Funds aiming to capitalize on companies addressing climate change through clean energy, water management, or sustainable infrastructure initiatives attract environmentally conscious investors.
    • iShares Global Clean Energy Exchange Traded Fund (ICLN)
    • Invesco Water Resources Exchange Traded Fund (PHO)
    • SPDR S&P Sustainable Infrastructure Exchange Traded Fund (SUSP)
  • Metaverse and Web3: Exchange Traded Funds focusing on companies involved in building the metaverse, blockchain technology, and decentralized finance are becoming increasingly popular, though still considered risky.
    • SPDR S&P Biotech Exchange Traded Fund (XBI)
    • iShares Global Healthcare Exchange Traded Fund (IEHG)
    • Vanguard Health Care Exchange Traded Fund (VHT)
  • Inflation Hedging: With rising inflation, Exchange Traded Funds investing in commodities, real estate, or companies with pricing power in essential goods offer potential protection against inflationary pressures.
    • SPDR Gold Shares (GLD)
    • Vanguard Real Estate Exchange Traded Fund (VNQ)
    • Invesco Consumer Staples Exchange Traded Fund (VDC)
  • Gender Equality: Socially conscious investors may target Exchange Traded Funds that promote gender diversity in corporate leadership or invest in companies with strong track records on gender equality.
    • SHE Exchange Traded Fund
    • SPDR Gender Diversity Exchange Traded Fund (SHE)
    • Pax Ellevate Global Women’s Leadership Exchange Traded Fund (WOMN)
  • Emerging Markets: Despite current challenges, Exchange Traded Funds providing exposure to high-growth emerging markets like China, India, or Southeast Asia can offer long-term diversification potential.
    • iShares Core MSCI Emerging Markets Exchange Traded Fund (IEFA)
    • Vanguard FTSE Emerging Markets Exchange Traded Fund (VWO)
    • Invesco China Technology Exchange Traded Fund (CQQQ)

 Note: These are just a few examples, and the popularity of particular sectors or themes can change rapidly. It’s crucial to conduct your own research, understand the risks involved, and align your investments with your financial goals and risk tolerance before making any decisions.

Additional Resources:

Remember, diversification is key regardless of the sector or theme you choose. Consider spreading your investments across different areas to mitigate risk and maximize your potential returns.

How Can South African Investors Get exposure to Global Exchange Traded Funds

For South African investors, accessing global Exchange Traded Funds involves a few key steps:

  • Selecting a Global Brokerage Account: Choose a brokerage platform that provides access to global markets. Ensure it offers a user-friendly interface and robust research tools.
  • Currency Considerations: Be mindful of currency conversion costs when trading in foreign markets. Some brokers offer convenient currency conversion services.
  • Comprehensive Research: Utilize global financial news sources and research tools to stay informed about international markets and Exchange Traded Fund options.

Global Exchange Traded Fund Options:

Explore diverse global Exchange Traded Funds based on your investment preferences:

  • World Equity Exchange Traded Funds: Track global equity markets, providing exposure to a broad range of countries and industries.
  • Country-specific Exchange Traded Funds: Invest directly in the economies of specific countries or regions.
  • Sector-specific Global Exchange Traded Funds: Target specific industries or sectors on a global scale.

Here are some of the major players globally: 

    • BlackRock (iShares): BlackRock is the world’s largest asset manager, and its iShares Exchange Traded Funds are among the most widely used globally. iShares covers a broad range of asset classes and investment strategies.
    • Vanguard Group: Vanguard is known for its low-cost index funds and Exchange Traded Funds. Vanguard’s Exchange Traded Funds are recognized for their passive investment approach, and the company is a significant player in the global Exchange Traded Fund market.
    • State Street Global Advisors (SPDR Exchange Traded Funds): State Street is the creator of the first Exchange Traded Fund, the SPDR S&P 500 Exchange Traded Fund (SPY). SPDR Exchange Traded Funds cover various asset classes and investment themes.
    • Invesco (PowerShares): Invesco offers a diverse range of Exchange Traded Funds through its PowerShares brand. The firm is known for its Smart Beta and thematic Exchange Traded Funds, providing investors with alternatives to traditional market-cap-weighted indices.
    • Charles Schwab: Charles Schwab has become a major player in the Exchange Traded Fund space, offering a range of low-cost Exchange Traded Funds. The company’s emphasis on commission-free trading has made Exchange Traded Fund investing more accessible to individual investors.
    • SSGA (State Street Global Advisors): Apart from SPDR Exchange Traded Funds, State Street Global Advisors is involved in various Exchange Traded Fund offerings, providing investors with exposure to different sectors and strategies.
    • WisdomTree Investments: WisdomTree is known for its Exchange Traded Funds that often follow fundamentally weighted indexes. They offer a unique approach to constructing indices and have a focus on currency-hedged Exchange Traded Funds.
    • Invesco QQQ Trust (QQQ): While Invesco is mentioned earlier, the Invesco QQQ Trust is worth highlighting separately. QQQ tracks the NASDAQ-100 Index and is particularly popular for exposure to technology and growth stocks.
    • ProShares: ProShares specializes in leveraged and inverse Exchange Traded Funds, allowing investors to seek amplified returns or hedge against market declines.
    • VanEck: VanEck offers a range of thematic and niche Exchange Traded Funds, covering areas such as gold mining, environmental sustainability, and emerging markets.

These asset managers represent just a portion of the global Exchange Traded Fund landscape, and new entrants and developments in the industry may have occurred since my last update. Additionally, regional players in specific markets may play significant roles in catering to local investor preferences. Always check the latest data and market trends for the most up-to-date information on major players in the global Exchange Traded Fund industry.

Considerations When Investing in a Global Exchange Traded Fund Directly

It’s important for South African investors to be aware of these implications before making investment decisions. Keep in mind that laws and regulations can change, so it’s advisable to consult with legal and financial professionals for the latest information. Here are some general legal considerations:

Regulatory Compliance:

Ensure that your investment complies with South African regulatory requirements. Regulatory frameworks can dictate how investments are made, repatriation of funds, and taxation.

Tax Implications:

Different countries have different tax regulations. South African investors should be aware of the tax implications associated with investing in foreign Exchange Traded Funds. This may include considerations such as dividend withholding taxes and capital gains taxes.

Currency Exchange Regulations:

Understand the regulations related to currency exchange and repatriation of funds. Investing in a foreign Exchange Traded Fund involves dealing with different currencies, and South African residents should be aware of any restrictions or reporting requirements.

Jurisdictional Issues:

Be aware of the legal jurisdiction governing the Exchange Traded Fund. While BlackRock and Vanguard are global firms, the specific legal jurisdiction of the fund may impact how disputes are resolved or how legal matters are handled.

Fund Documentation:

Thoroughly review the fund’s documentation, including the prospectus and terms and conditions. These documents outline the fund’s objectives, strategies, risks, and legal structure.

Investor Protection:

Consider the investor protection mechanisms in place. Regulatory bodies and industry standards may provide safeguards for investors, but understanding these protections is crucial.

Custodian Arrangements:

Understand the custodian arrangements for the Exchange Traded Fund. Custodians play a key role in safeguarding the assets of the fund, and their legal responsibilities can impact the safety of your investment.

Legal Agreements:

When investing in an Exchange Traded Fund, you are essentially entering into a legal agreement. Understand the terms and conditions, including fees, redemption procedures, and any restrictions on the transfer of shares.

Dispute Resolution:

Be aware of the dispute resolution mechanisms in place. Know how disputes will be resolved and the legal recourse available to investors in case of disagreements.

Documentation for Estate Planning:

If applicable, consider the legal implications for estate planning. Ensure that your investment aligns with your broader financial and estate planning goals.

It is highly recommended to seek advice from legal and financial professionals who specialize in cross-border investments. They can provide personalized guidance based on your individual circumstances and the specific characteristics of the Exchange Traded Fund you are considering. Additionally, staying informed about changes in regulations and regularly reviewing your investment strategy is essential for managing legal considerations effectively.

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