How can one buy an ETF?
There are two ways in which you can buy and sell ETF’s. This can be done through the primary or secondary market.
The primary market is where the investor purchases the securities directly from the issuer. New shares will be issued in the market by the issuer. If you invest in the primary market directly with Satrix Managers one has to invest in a basket of securities equal to 1 million units of the respective Satrix fund.
In the secondary market the investor purchases the securities from other investors as one would do with any other ordinary share trading on a stock exchange, rather than directly from the issuer as with the primary market. Exchanges such as the Johannesburg Stock Exchange are secondary markets.
Investors that invest in the secondary market will do so by investing through a broker or other platforms such as the Satrix Investment Plan.
Tracking a benchmark
When an ETF is created, it is pegged to a benchmark. As in the case with Satrix 40 benchmarks may be large indices such as the FTSE/JSE Top 40 Index.
ETF’s that hold stocks (such as Satrix ETFs); hold stocks in the same proportion to the market index. Therefore if the index or sector does well so does your ETF. If the index drops, so will the price of the ETF. The ETF therefore tracks the index.
Using Satrix 40 as an example, the asset managers of the ETF that perform the tracking will buy and sell stocks when the Top 40 index adds or removes stocks from the index. This is known as rebalancing and in the case with the FTSE/JSE Top 40 index this is done quarterly. Changes to the index will also occur if companies included in the index have corporate actions.
Tracking variance, or tracking error, measures the difference in performance between an ETF and the underlying benchmark. This difference is primarily due to the various costs ETFs incur, such as management fees and administrative expenses. Taken together, these costs are represented by an ETF's Total expense ratio, or TER. The lower the TER, the lower the tracking error. Tracking errors can also occur when the ETF buys or sells a stock due to the index rebalancing or a corporate action.
Distributions
ETFs such as Satrix ETFs that invest in equities earn income, which are distributed at least annually to investors. Stock-only ETFs will primarily earn dividend income. Satrix ETFs income is distributed quarterly to its investors with the exception of Satrix RAFI that reinvests the dividends received into the portfolio.