What is a simple way to financially emigrate? Ryan Basdeo shares this insights on how to maximize ETFs. Learn how can South Africans use this knowledge to build smart portfolios in the face of local economic headwinds.
By Ryan Basdeo
A“Stick to your knitting”, goes the old saying. Like many nuggets of wisdom that have stood the test of time, this captures a simple but powerful truth. There are benefits to focusing on the things you’re good at.
This translates well into macroeconomics. Much of the monumental rise in prosperity the world has seen in recent decades is the result of specialisation and trade. Blessed with mineral resources, South Africa can produce an ounce of gold far more efficiently than most countries. It makes sense for us to become exceptionally good at this and to sell on the global market. Contrast that with Taiwan. Lacking space and deposits, the small Asian island couldn’t hope to flourish on mining. So they stick to their knitting. They produce computer processors better than anyone else and sell them to every corner of the world. And the list goes on.
In short, when we specialise and trade, we all benefit. The question is, how can investors benefit from this? In particular, how can South Africans use this knowledge to build smart portfolios in the face of local economic headwinds?
Perhaps the most powerful tool we have for such “financial emigration”, as it’s popularly known, is the exchange traded fund (ETF). An ETF can be listed and traded on the Johannesburg Stock Exchange (JSE) and enable us to invest in an array of assets, across geographies and industries. Designed properly, it can do this with extraordinary efficiency.
Globalise and gain
An ETF listed in South Africa is bought and traded in rands. However, holding this asset can give local investors exposure to an almost unlimited array of equities and bonds around the world. Whether it’s shares in a basket of government bonds or shares in blue-chip Asian corporates, there’s a product that does the job.
Whether it’s the Taiwanese knack for tech or German engineering you want in your portfolio, there’s an ETF for that.
The diversification benefits go beyond the geographic. An intelligently constructed portfolio will also be able to utilise ETFs to diversify across market cycles. This gives financial planners powerful capabilities to craft a client’s risk-return position.
It is also tax efficient. You can invest via your tax-free savings account. That means avoiding paying capital gains, dividend withholdings or income tax within specified limits. Additionally, certain types of investors need not utilise their offshore allowances.
All of the general benefits of ETFs apply, too. You can try individually purchasing shares in 1 480 companies around the world in the relevant currencies, or you can get access to all 1 480 by holding the 1nvest MSCI World Index Feeder ETF.
Fancy something slightly more targeted? You can use an ETF to “buy emerging Asia”. The 1nvest MSCI EM Asia Index Feeder ETF gives a portfolio exposure to the performance of large- and mid-cap stocks in 8 select Asian emerging countries. This is a good option to participate in the burgeoning sectors of information technology, financials and consumer discretionary.
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