What the ETF?
At a first glance an ETF might look a bit like its distant relative: a unit trust. But unlike its cousin, this sexy little portfolio of different shares, bonds, and other instruments, is single and ready to mingle – it can be traded on stock exchanges (like the JSE) as one instrument. The most common ETFs are designed to track the performance of a market benchmark or index by mirroring the makeup of that index in a portfolio.
Other ETFs can track things like how gold is doing (NewGold ETF) or even the performance of the MSCI Emerging Markets Investable Markets (STXEMG), which represents large, mid and small cap companies across 24 emerging markets globally. When these indexes go up or down, so does that ETF’s price and the value of your investment.
And ETNs?
Like ETFs, ETNs are traded like shares on the JSE and also track returns of benchmarks or indices similar to those tracked by ETFs. But get this: ETNs do not actually hold any securities in the benchmark they track. Mind. Blown.
Instead, an issuing bank promises to pay to investors the return reflected by the index’s performance minus their fees. Where an ETF would sometimes reflect a difference in value between its collection of shares and the actual one on the index it tracks (because it’s always buying and selling those shares to match the index which can cause a slight delay), an ETN is guaranteed to match the index exactly. But that guarantee doesn’t come for free (nuh uh!). Banks charge for the fact that they are guaranteeing the returns of the ETN. Technically that makes ETNs riskier than ETFs because if the firm which issued the particular ETN were to go bankrupt, investors might not receive their full investment back. But because an ETF actually contains all of those assets, even if the management firm went bankrupt, the fund investments would still be valuable.
It is important to note that ETNs are not permissible in a tax free savings account because they are not registered as collective investment schemes.