An ETF is defined as a listed investment product, which tracks the performance of a particular index (e.g. NSE 20, NSE 25) or “basket” of shares, bonds, money market instruments or a single commodity. These are known as underlying securities or assets. ETF are traded on an exchange just like an ordinary share and the price of a particular ETF will be determined by the demand and supply of the ETF. An ETF can be a domestic or offshore product
- Index ETFS– Most ETFs are index funds that attempt to replicate the performance of a specific index. Indexes may be based on stocks, bonds, commodities, or currencies. An index fund seeks to track the performance of an index by holding in its portfolio either the contents of the index or a representative sample of the securities in the index.
- Bond ETFs– They invest in bonds. They thrive during economic recessions because investors pull their money out of the stock market and into bonds (for example, government treasury bonds or those issued by companies regarded as financially stable).
- Commodity ETFs (ETCs) – Invest in commodities such as precious metal, agricultural products and hydrocarbons.
- Stock ETFs–This was the first and most popular ETFs. This type of ETF owns funds from other stocks
B. Benefits of exchange traded funds
- Diversification – ETF give investors exposure to a wide variety of securities or assets, avoiding the risk of “putting all your eggs in one basket”.
- Regulation – ETF are well regulated by both the Nairobi Securities Exchange (NSE) and Capital Markets Authority (CMA). Investors therefore have added protection against unjust treatment.
Cash flow distributions (dividends) – Even though owning an ETF does not give direct ownership of the underlying securities of the index being tracked, owners of an ETF are still eligible to receive dividends should the securities in the tracking index pay dividends.
- Liquidity – Buying or selling ETF can be done quickly and at a low cost at the NSE.
- Tax – ETF are exempt from Capital Gains Tax upon sale of the ETF.
- Hassle free investment – Investors can gain exposure to a wide variety of securities or assets without having to buy each of the underlying constituents individually, conducting extensive research, nor actively managing the underlying securities
- Transparency– ETFs disclose their holdings on a daily basis, thereby enabling investors to know exactly what stocks or underlying assets they hold, what the value is and to make more informed investment decisions
- Flexibility– Like an equity market, ETFs trade throughout market hours.
Parties involved in an ETF issuance
Market Maker-a market maker in Kenya’s ETF market shall play the role of creating liquidity through two-way price quotes in order to eradicate substantial price gaps and ensure a liquid market for all.
Manager– The Fund Manager acts on its behalf for the purpose of managing the ETF or undertake to manage the ETF.
Trustee-A trustee primary responsibility of protecting the interests of investors.
Current Issuances in the market
|Issuer||Name||Type of ETF||Listing Date|
|1.||Absa Group||Absa Gold Backed||Commodity ETF||2016|
More information on Exchange Traded Funds:
Exchange Traded Funds at the NSE
Policy Guidance Note for Exchange Traded Funds