“No invention has been more disruptive to the asset management industry in the last quarter-century than the exchange-traded fund.” – Crystal Kim

There’s a reason why ETFs have been become successful and widely adopted, with over $10Trillion dollars in Global Assets Under Management (For context, ETFs have been around for just over 30 years).

Where it all Started

Let’s start from the very beginning; the first ETF was on the Toronto Stock Exchange in 1990 with the listing of the Toronto 35 Index Participation Units (TIPs 35). Also, the first US ETF was launched in 1993, with the listing of the SPDR S&P 500 ETF, commonly known as “SPY”, tracking the performance of the S&P 500 Index. This ETF is currently the largest and most liquid ETF in the world with over $450Billion Assets Under Management. A tidy sum, isn’t it? According to a Global ETF survey conducted by PWC, Global ETF assets are poised to reach US$15 trillion or more by the end of 2027.

What are ETFs?

Exchange traded funds (ETFs) are open-ended funds that are listed and traded on exchanges like stocks. ETFs track the performance of an underlying index, basket of securities or commodities. Just like any security, ETFs trade on the Exchange. Data suggests that globally, investors are channeling more funds into ETFs than traditional Mutual Funds. A key reason is that ETFs, in many instances, provide easy and quick exposure to desired assets, sectors or markets. Also, one can argue that another reason ETFs have been successful is because they generally have lower costs than Mutual Funds, and as investors have become more sophisticated and demanding, expense ratios have become more and more important in investment decision making.

I have also seen an interesting perspective in speaking to a number of investors and ETF issuers locally and internationally, and this is the notion (rightly or wrongly) that passive strategies can deliver competitive returns, over the long haul, even when compared with active strategies (we will drill down into this in another article). Fortuitously, ETFs have become synonymous to passive investing and as such considered an attractive proposition, from a return perspective (it is important to note that, whilst a vast majority of ETFs pursue passive strategies, we also have active ETFs).

ETFs in Nigeria

Bringing the discussion closer home, ETFs were introduced to the Nigerian market in 2011 with the listing of a gold-backed commodity ETF (The Newgold ETF). Subsequently, we had the listing of the first equity ETF in Nigeria, the Vetiva Griffin 30 ETF, which tracks the NGX 30 index. Currently, there are over 10 listed ETFs in Nigeria, holding approximately ₦9.7billion in assets with exposures ranging from Equities to Fixed Income and Commodities.

So, as a Nigerian Investor, why should I invest in ETFs? ETFs can act as a tool to achieve efficient portfolio diversification, without having to go through the rigors of the individual stock or bond selection process. It is interesting to note that ETFs in Nigeria cover the major asset classes and sectors, offering broad exposure to investors, and delivering target returns in line with the relevant indices.  A unique proposition for ETFs in Nigeria is also transparency in respect of the underlying holdings of the fund, allowing investors to understand exactly what assets they are investing in.

ETF Strategies

Because ETFs are flexible investment vehicles, they can be used in various ways to achieve diverse investment objectives. For example, ETFs can be used to express a strategic allocation objective ranging from targeted exposure to a specific sector, asset class or even a geographic region. Let’s say you believe that the Banking Sector will outperform in the coming year, rather than piling a number of banks into your portfolio and struggling with the optimal weightings, you can simply purchase a Banking Sector ETF.

I have also found ETFs to be effective in executing a core-and-satellite strategy. This is when an investor creates a core and stable portion of a portfolio with ETFs that provide broad exposure to desired assets or markets and then actively manages a tactical portion of the portfolio to take advantage of opportunities as they present themselves from time to time i.e., in search of alpha (excess return of an investment relative to the return of a benchmark index).

Lastly, an emerging use of ETFs is in Thematic investing, in which ETFs are used to position in asset types that stand to benefit from identified macro-level trends whilst still maintaining a diversified position and minimising security-specific risks.

In summary

On a final note, whilst ETFs might not be a total solution for every investor, there is a case for Nigerian investors to include ETFs in their portfolios to take advantage of an affordable and convenient way to gain market exposure and express diverse market views.