ETFs 25 years on will they displace unit trusts?

EXCHANGE traded funds (ETFs) launched in South Africa in 2000, 25 years ago. Although their growth was initially slow compared with the United States and other countries, the local industry is now expanding rapidly, especially since the introduction of actively managed ETFs (AMETFs) in 2023. Will ETFs, in the years to come, displace unit trust funds as the instrument of choice in the collective investments space? There's a lot going in their favour.

- MARTIN HESSE

A recent conference in Cape Town hosted by Prescient, which spelled out its vision for the future of ETFs in its publication “ETF Evolution: Insights into South Africa's Investment Landscape”, provided valuable insights into the ETF market and its increasing popularity.

Essentially, it comes down to democratisation, ease of access and low barriers to entry. Unit trust funds, known overseas as mutual funds, were the first step in this democratisation process.

The unit trust landscape

The first unit trusts, offering a basket of assets within a pooled investment, appeared in the mid-1960s and quickly caught on among people who could not afford to invest directly in the financial markets. Unit trust management companies flourished in the last quarter of the 20th century and into the new millennium. From a handful of funds in the 1970s, there are over 1 500 funds in South Africa today. The vast majority of them are actively managed, meaning the fund managers and their teams of analysts research and choose the underlying assets, such as shares and bonds.

Unit trusts were relatively easy and flexible to invest in, either directly with the management company or on an investment platform offering funds wrapped inside products such as retirement annuities.

This was the era of the rise of the current giants of asset management, including Allan Gray, Coronation, and Ninety One (formerly Investec Asset Management).

ETF revolution