Continuing our coverage of the Zimbabwe Stock Exchanges new aggressive stance towards attracting domestic capital holders to participate on the exchange we will take a look into another new product ZSE chief executive Justice Bgoni mentioned which is the Exchange Traded Fund (ETF). According to Investopedia, an exchange-traded fund (ETF) is an investment fund traded on stock exchanges, much like stocks. An ETF holds assets such as stocks, commodities, or bonds. ETFs will bring opportunities not previously available on the market and open up to participation by more players.
How it works
A fund manager holds a (sometimes) carefully selected group of shares in other companies, let us imagine the fund has 1 million dollars invested in various ZSE shares based on the manager’s preference. This fund, has it’s own ownership divided into small units similar to equity shares, say for the purposes of this example one million shares at a dollar each. These shares are sold on the exchange as though they were individual shares, hence the name exchange-traded funds. An individual can buy shares in the fund, subject to availability of holders who intend to sell in small quantities. The fund benefits from all proceeds, including dividends of all shares they hold though they may pay out quarterly or semi-annually.
Ease of entry/exit
First of all ETFs offer ease of entry and exit. Because they are sold in small units similar to the example above it means individuals do not require huge net worths to start investing in shares. You simply buy into the fund which buys the stocks and holds them.
Exchange-traded funds tend to be index funds and as such do not charge large management fees. Fund managers usually charge aggressively for their services but index funds simply follow a group of shares that have similar characteristics. The ZSE last year announced the new indices they would start publishing which included a Financial index (Finance sector shares), Consumer Staples, Consumer Discretionary (luxuries), ICT and a Real estate Index. There is less work involved in tracking an index than in carefully curating a portfolio.
ETFs are of course not entirely invested in one index but may prefer to diversify across indices. This gives holders of ETFs diversification across many shares or sectors. Diversification is important in capital markets because it protects investors from industry shocks. Imagine a scenario in which Zimbabweans who could, decided to work remotely. You can imagine this would grossly impact real estate based companies negatively. However, all these remote working arrangements would result in a boom cycle for telecommunications and ICT companies. Holding the two would spread out the risk.
Again while we are very pleased that the ZSE has shown great interest in our humble Zimbabwean dollars a lot of details are unclear at present. Much will come to light as we approach the launch dates of these new products. This is, of course, a very positive development.