Three things to watch out for when investing in ETFs

Exchange-traded funds (ETFs) are arguably the most popular investment vehicle among private investors. They give you easy and cost-effective access to various stock market indices, megatrends, bonds, property…you name it. And typically, they outperform funds managed by professionals.

But as much as I advocate for investing in ETFs, you need to be aware that despite their simplicity and great performance, there are some “flaws” in ETFs that you need to know about…

Flaws that can cost you money and miss out on higher returns!

Today, I’m going to discuss three of them…

#1: Not all ETFs are made equal…

Let’s consider two property ETFs…

• 10X South African Property Income ETF
• 1nvest SA Property ETF

Both ETFs give you the performance based on JSE property companies. They both even hold a similar top 10.

The difference is…

The weightings in the 10X South African Property Income ETF are never high than 10% per company. In fact, they’re relatively close in terms of weightings. For example, NEPI, Redefine and Growthpoint have weightings of 8.4%, 8%, and 7.6%, respectively.

Meanwhile in the 1nvest SA Property ETF…

NEPI, Growthpoint and Redefine weightings are 27.41%, 14.55% and 10.11%, respectively. So, you can see there’s a huge difference. And this difference can determine returns.

For example, over three years to June 24….
10X South African Property Income ETF has returned 16.98%, and 1nvest SA Property ETF has returned 11.48%.

#2: Smart ETFs are not always “smart”

Smart ETFs are ETFs that don’t follow an index based on equal or market cap weightings.

They use a specific criterion to determine the weightings of shares in the index.

The Satrix Divi is a good example of this…It invests in the top JSE dividend payers which on the surface sounds like a reasonable idea, but the strategy is a little flawed.

That’s because the index looks at historical dividends. That means, a company with the largest dividend over the past year will be very attractive to it – but it doesn’t consider whether the dividend will be repeated.

For instance, 50% of the Satrix Divi’s top 10 holdings are commodity companies. Because the commodity markets operate in up and down cycles, it’s very hard to accurately predict future dividends. And of course, a downturn in commodity prices typically hurts commodity company’s profits and cash flow, and its dividends.

Thanks to this, the Satrix Divi’s return for 2024 is -2.07 compared with the Satrix Top40’s return of 5.35%.

Now, smart ETFs can give you better performance than normal market-weighted ETFs, but the moment something abnormal happens in the market i.e. companies cutting dividends, this type of index loses.

When Investing in dividend stocks you have to look beyond what their most recent yield and take a deeper look at the quality of the company and its ability to continue to pay dividends… That’s why I pefer to create an income portfolio with individual dividend paying stocks with Real Wealth. And to date that’s paid off handsomely. You can find our top 3 dividend paying stocks in our Retire Rich with Dividends Report. You can find out how to claim a free copy here.

#3: The same ETF can cost you different fees

When ETFs launched, your only choice was investing in Satrix ETFs. These days, there are many companies offering you a diverse selection of ETFs.

For example, if you wanted to invest in the top40 JSE listed stocks by market cap, you could pick between Satrix, FNB, 1nvest and Sygnia’s top 40 funds.

They all track the same Top40 index. But what you will notice is they all have different fees and different returns.
Look below…

You can clearly see one winner – Satrix Top40 – in terms of return and fee.

Even if for example, Sygnia’s Top40 ETF one year return was the same as Satrix’s, the small difference in the fee you pay, could make a massive difference.

While you may not be able to gauge who is likely to have the best return, you can make sure you don’t end up paying high annual fees.

If you looking for lower risk, income producing investments like these, then make sure you follow Real Wealth. We have a track record of delivering an average real return of 14.98% since we started some 14 years ago. A R5,000 monthly investment would have turned into R1.37 million over 10 years. If you’d invested from the start 14 years ago, that same investment would now be worth R2.7million! If you’re struggling to grow your nest egg, then here’s your chance