The Executive Director at Vetiva Capital Management Limited, Mr. Damilola Ajayi, speaks about opportunities in the Exchange Traded Fund market, the benefits of patronising the products, among others. Goddy Egene brings the excerpts:

Let’s start with a basic question. What is an Exchange Traded Fund (ETF)?

An ETF is a security that tracks an index, a commodity or a basket of assets like an index fund. ETFs are typically passively managed and replicate/track the performance of an underlying index or basket of securities. It is important to note, however, that there are some actively traded ETFs. Also, ETFs combine the characteristics of mutual funds and stocks in the sense that they are typically but not always structured as funds and they trade on an exchange like any other listed security. For example, you can purchase an ETF on the Nigerian Stock Exchange (NSE) the same way you would purchase Guaranty Trust Bank stock or First Bank of Nigeria stock. I have used these names just as examples to drive home my point. Now, it is important to note that there are various types of ETFs available to investors that can be used for different investment objectives such as income generation, speculation, capital appreciation or to hedge or partly offset risk in an investor’s portfolio. On the NSE currently, we have a commodity ETF, equity ETFs and a fixed income ETF. There are also a number of ETFs that are in the pipeline and we hope these will be listed soon. ETF types are not limited to the ones I just mentioned, there are other types of ETFs like currency ETFs among others.

Investors in Nigeria have investment options available to them. Why should Nigerian investors, both retail and institutional, be interested in ETFs?

That’s a good question. There are several benefits of ETFs. One core benefit is diversification and closely related to that is convenience. ETFs provide immediate exposure to a whole market or market segment or asset class through a single security that investors can purchase. For our readers to understand this point, let’s remember that we can loosely exchange the word “security” for “stock”. For example, when we hear or read about the performance of the NSE All-Share index, the quoted performance is the consolidated performance of all the securities or stocks listed on the NSE. An ETF can be used to give investors exposure or access to that performance via a single security that they can purchase. Another benefit of ETFs is transparency, which you would agree with me is important to investors –information on constituent assets and holdings are publicly available. At any point in time, investors have access to the list of stocks or securities being held by the relevant ETF and let me add that in Nigeria, ETFs are fully hedged or represented by underlying assets, which mitigates any credit or other risks in delivering the expected performance. Another benefit, though not specific to ETFs, is that ETFs are held by independent trustees and the sector is fully regulated. The objective here is to protect investors. Also, let me speak about liquidity. On the NSE, each ETF has a liquidity provider or market maker which provides full liquidity and ability to exchange the ETF for the underlying constituents. Lastly, because ETFs are typically passive in nature, they tend to have a lower fee structures when compared with actively managed funds.

From our investigations, it would seem that many people do not see the difference between ETFs and traditional mutual funds. Can you please shed more light on this?

I have gotten this question many times. ETFs are quite similar to mutual funds as they both invest in a pool of securities to offer investors diversified portfolios. There are, however, significant differences between ETFs and traditional mutual funds. While ETFs can be bought and sold like any stock on an exchange –meaning they can be traded continuously throughout the day, mutual funds trade just once a day through the fund manager. Another major difference is the cost structure, ETFs are typically cheaper since the underlying assets are passively managed with minimal trading costs. A third key difference (even though not in all cases) is portfolio transparency. Investors have full access to the portfolio or asset composition of ETFs which may not be possible with Mutual Funds except for fully replicated index funds.

Have ETFs been successful globally as an asset class?

ETFs were introduced in the 1980s and became popular very quickly because they were generally much cheaper than other traditional Collective Investment Scheme products.

Information available reflects a phenomenal growth in the ETF industry. The ETF industry has grown to over $6.1 trillion in assets compared to the approximately $204 billion worth of ETF assets in 2003. Currently, almost 20 per cent of trading on the New York Stock Exchange is in ETFs. The ongoing success of ETFs is driven by two factors: Low cost and convenience to the investing public. Going forward, however, I believe innovation and further cost efficiencies will be a global driver of ETFs. The ability of ETF issuers to create products that will grant access to asset classes or investment opportunities that would ordinarily have not been available is also key going forward

Lets now come back to our domestic market. How successful has the ETF sector been?

I would say the sector has been successful but would accept that there is a lot of room for improvements in industry performance. The Nigerian ETF Journey begun in 2011 with the Newgold ETF, which tracks the price of Gold Bullion. Vetiva acted as an adviser to this listing. Also, Vetiva issued the first equity ETF in 2014, the Vetiva Griffin 30 ETF, which tracks the NSE 30 Index. Presently there are over 10 ETFs listed on the NSE spanning across different asset classes with a total AUM or market capitalisation of over N20 billion as at today

We have noticed that the NSE, Vetiva and other firms have been pushing ETFs as an asset class. What is the relevance of ETFs in the development of the Nigerian capital market?

Being a relatively new asset class, the market still seems to be going through a learning curve, but from what we have seen over the years, the appetite for ETFs has been very encouraging especially as investors are beginning to appreciate how to use ETFs in their portfolios. We believe that the ETFs have broadened the choice of investment options available to investors in the Nigerian capital market especially, retail investors. Also, critical to the role of an Exchange is capital formation. ETFs facilitate capital formation by allowing ETF issuers to bring products to the market that offer investors unique investment opportunities in multiple asset classes that they might not otherwise be able to access.

Can you talk more on Vetiva’s ETFs. You only mentioned the Vetiva Griffin 30 ETF earlier?

Vetiva’s ETF suite comprises the Vetiva Griffin 30 ETF which tracks the performance of the NSE 30 Index like I already mentioned. We also have the Vetiva Banking ETF which tracks the performance of the NSE Banking Index, the Vetiva Consumer Goods ETF which tracks the performance of the NSE Consumer Goods Index, the Vetiva Industrials ETF which tracks the performance of the NSE Industrials Index and the Vetiva S&P Nigerian Sovereign Bond ETF which tracks the performance of the S&P/FMDQ Nigeria Sovereign Bond Index;
You seem to suggest that it is easy to invest in ETFs. Despite this, when speaking to investors, we get the sense that people still don’t understand how to trade ETFs. Can you speak to this?

Yes. ETFs are very easy to trade. ETFs trade like any other listed stock on the NSE and units of the ETFs can be purchased on the floor of the NSE through any broker. If investors have any challenges, they should feel free to reach out to any ETF issuer or the NSE. However, one thing I would like investors to understand is that an ETF is not a silver bullet to solve the challenge of seeking attractive returns. ETFs are tools used to express the views of an investor in respect of an asset class, securities type or market segment. I would advise investors, especially retail, to seek adequate information on asset classes to which exposure is being sought or seek the services of an investment professional where necessary.

Given the year-to-date performance of the market, which is positive, how will this impact ETF investors? Also, do you think that this bull run can be sustained till the end of 2020?

As I mentioned at the start of this interview, ETFs seek to replicate the performance of an underlying index or basket of securities. In the context of the performance of our local market therefore, any ETF that tracks the broad market or market segment should deliver similar returns when compared with the relevant index. For example, the price return, I believe, of the NSE 30 Index YTD to 30th October is approximately 12 per cent and the price return of the VG30 ETF, which is an ETF that tracks the NSE 30 Index is approximately 11.5 per cent. We can see the similarity in performance and this is a practical example of how ETFs provide exposure to the performance of an index. With respect to the current upward trend in the equities market, to answer your question, we need to dimension the reasons for the upward trend in this first instance. The consensus is that low yields in the fixed income space have triggered a diversion of liquidity to the equities market. The question therefore is that, will the low yield environment persist till the end of the year? I believe that it will, but probably not at current historical lows. By implication therefore, I believe that the market will likely print a positive ASI return by the end of the year. This of course, is subject to the overall macro-economic climate.