The South African Exchanged Traded Fund (ETF) market continues to grow steadily. By the end of last year, the market capitalisation of South African exchange traded products reached 225.4 billion South African rands, marking a notable 36.2% increase from the previous year.
Article by: Kim Gibb, Chief Executive Officer at Prescient Management Company
What is driving the growth in the South African ETF market?
Retail platforms like Easy ETFs and Easy Equities have played a big role in the growth of the passive ETF market in South Africa. They cater to mass retail investors who can invest small amounts over long periods of time. Because of this demand, index strategies accounted for 87% of net inflows in the South African ETF market over the course of 2024.
South Africa’s population is relatively young, a similar situation to many other African countries. Thus, the emphasis for wealth managers must be on the appetites and requirements of the younger investor. We are hoping that a new generation of younger investors who are also tech savvy, will enter the investing market. This will drive long term growth in ETF products.
The continent of Africa has a rapidly expanding and increasingly wealthy middle class that is seeking access to investments and other financial services via online investment platforms, micro investing and robo advisors.
The investment market in South Africa is becoming increasingly democratised with many investors seeking options that will reduce their local currency risks. As the demand for investment options continues, so local capital markets need to evolve to meet these and create increasing depth. ETFs have an important future role to play in this respect.
Actively managed ETFs can also serve a valuable role in the portfolio construction of model portfolios for wealth managers. It is far simpler to trade an investment fund as part of the share portfolio than a traditional unlisted mutual fund. This gives the wealth manager far greater flexibility in their investment allocations.
While there are already some big players in the domestic South African ETF market, like Satrix, 1Invest and Signia, there is also a growing component of active ETF managers now listing on the Johannesburg Stock Exchange. Prescient continues to provide an important service in assisting active managers to list on the JSE. Prescient listed the highest number of active ETFs in 2024.
Actively managed ETFs are gaining traction
Actively managed ETFs are gaining traction because investors are seeking more dynamic and potentially higher return opportunities. The majority of the listings that Prescient is managing in South Africa are from fund managers who want to launch actively managed ETFs.
We anticipate one area of growth for active ETFs to be those funds that can offer enhanced income returns. This allows cash that is part of a share portfolio to be invested in an actively managed income ETF, earning a higher income yield for the investor.
Currently the range of actively managed ETFs in South Africa remains limited but we anticipate that as more funds come onto the market, this in turn will help to generate further growth. For now, the scope for diversification in the actively managed space remains low. We expect that as more domestic active funds become available this will in turn generate more investor interest and further product launches to meet that demand.
Changes in South African investing habits
South Africa is experiencing a growth in retail investors in the stock market, fuelled by the successful retail investment platforms mentioned above. If growth patterns follow those from other markets like the US, we anticipate this will drive more inflows to ETFs due to their liquidity and ease of access compared to more traditional options.
Retail interest in stock market investing generally in South Africa was minimal prior to the pandemic, when, according to the JSE, private investors represented only 3% of trading volumes. We have seen this jump significantly since 2021 with retail investors playing a bigger role in daily deal flow. As interest rates decrease, we also expect to see more appetite for higher yielding investment strategies in the active ETF space.
The opportunity for offshore fund managers
We are seeing a continuing trend of larger non-South African ETF managers entering the market. They are using South Africa's Collective Investment Scheme foreign fund marketing regulations to market offshore ETFs in South Africa. We think this could be the start of a trend where more offshore ETF managers will recognise the growing opportunities in the South African wealth market.
Growth opportunities for non-South African ETF managers will continue to be limited by restrictions on the amount of capital South African citizens can invest outside of the country. However, we do see structuring opportunities for offshore ETF managers who want to raise money in South Africa.
For example, we are now seeing possibilities for international asset managers setting up funds in Ireland, to also create ETF share classes that could be marketed in South Africa under the Section 65 regulations. These ETFs can also be inwardly listed on the Johannesburg Stock Exchange.
Some of the South African demand for offshore ETFs is being shaped by the quest for investment options that don't currently exist in the domestic South African ETF market. It is, however, to be expected that mass market retail will continue to play a much more important role in the growth of our market.
