What is an ETF?
ETFs are one of the most popular ways for South Africans to invest — and for good reason. This guide explains what they are, how they work and how to weigh one up, in plain language.
ETF, explained simply
An ETF, or exchange-traded fund, is a single investment that holds a basket of many assets — often dozens or hundreds of shares. When you buy one unit of an ETF, you own a tiny slice of everything inside it. And because ETFs are listed on a stock exchange, you can buy and sell them during market hours just like an ordinary share.
Think of it as buying a ready-made hamper instead of picking every item individually.
How ETFs work
Most ETFs are index trackers. Instead of a manager trying to beat the market, the fund simply mirrors an index — a defined list of shares. For example, an ETF tracking a top-40 index holds the 40 largest listed companies in roughly the same proportions as the index. If the index rises 5%, the ETF aims to rise about 5% too.
Because there's no expensive stock-picking involved, index ETFs usually charge very low annual fees compared with actively managed funds.
Why investors like ETFs
- Instant diversification — one purchase spreads your money across many companies, reducing the impact of any single one failing.
- Low cost — small annual fees mean more of your return stays with you.
- Simplicity — no need to research and pick individual shares.
- Transparency — you can see exactly what the fund holds.
Types of ETFs
ETFs come in many flavours: broad local-market ETFs, global equity ETFs, sector-specific funds (like property or resources), bond ETFs, and commodity ETFs that track gold or platinum. This lets you build a diversified portfolio from a handful of funds.
What to check before buying an ETF
- The index it tracks — what exactly are you buying exposure to?
- Total cost (TER) — the total expense ratio, charged annually. Lower is generally better.
- Distribution policy — does it pay dividends to you, or reinvest them?
- Size and liquidity — larger, well-traded ETFs are easier to buy and sell at fair prices.
ETFs and tax
Holding ETFs inside a tax-free savings account lets their growth and dividends compound without tax, up to your annual and lifetime limits — a powerful combination for long-term investors.