ETFs taking over South Africa

Satrix CIO Kingsley Williams said South Africa’s investment market is seeing a clear shift toward indexation, with products like ETFs gaining traction.

One key to this growth is investors realising that indexation is not a “passive” form of investment, as many once believed.

“If you blindly trade to follow an index, you run the risk of destroying value for your investors,” Williams explained. 

“A lot of discretion goes into trading efficiently and responsibly. It’s not active management in the traditional sense of stock picking, but it is active risk management.”

Williams said there has been a shift in the South African investment market, with a clear move towards indexation.

This follows a global trend towards so-called “passive” investing, with many investors no longer primarily aiming to beat the market, but “choosing to harness the power of owning it”, Williams said. 

“Retail investors led the way, and institutional investors are now following,” he said.

He referred to an analysis by the European Corporate Governance Institute, which showed that index ownership of companies grew from 3.0% of global market capitalisation in 2004 to 16.9% in 2023. 

By the end of 2023, index-based investors owned 10% or more of 5,300 firms globally.

“There is definitely a change afoot in the South African market, and a clear move towards indexation,” Williams said.

He said one key to this shift has been improved education on indexation, with Satrix in particular aiming to dispel the myth that it is “passive”.

Williams explained that most investors understand “passive investing” as building a portfolio that replicates a broad market index or subset thereof.

This, in turn, gives investors exposure to the market or a specific segment of it through an index. 

“The portfolio holds the index’s constituents, usually in the same weights, so its return should match the index’s, less fees, and tracking error,” he said. 

“Warren Buffett famously illustrated the idea when he won his 10-year, $1 million charity bet that a low-cost S&P 500 index fund would outperform a selection of hedge funds, with the result confirmed in 2018.”

The growth of ETFs in South Africa

 South Africa’s ETF market has shown substantial growth over the past few years, with the market cap of these products reaching R225.4 billion at the end of 2024, a 36.2% year-on-year increase.

According to Prescient Management Company CEO Kim Gibb, index strategies accounted for 87% of net inflows in the South African ETF market in 2024.

Gibb attributed this growth largely to retail platforms such as Easy ETFs and EasyEquities, which cater to mass retail investors.

Satrix, as South Africa’s largest provider of index-tracking products, has also benefited from this growth, now boasting R320 billion in assets under management.

Williams said the local ETF market’s growth helps dispel the myth that indexation is a “passive” process whose results underperform those of stock picking. 

“Previously, you didn’t have a long-term track record,” he said. 

“Now you have the realised performance of index funds on a like-for-like, net-of-fees basis versus active alternatives, and you can see the experience clients have enjoyed.” 

“Along the way, we’ve shown that indexation done well compares very favourably with any other investable option at your disposal.”

Rather than being passive, Williams said that, behind the scenes, careful work goes into optimising index funds so that they deliver the index’s performance at the lowest cost. 

“If you blindly trade to follow an index, you run the risk of destroying value for your investors,” he said. 

“A lot of discretion goes into trading efficiently and responsibly. It’s not active management in the traditional sense of stock picking, but it is active risk management.”

Crucially, Williams said that the growth of ETFs is also positive for investors, as it brings the benefits of scale.

“Index funds are cost-effective by nature, but our growth has allowed us to price even more efficiently,” he said. “That makes the value proposition difficult to ignore.”

He pointed out that the growth in products like ETFs comes at a time when investors are contending with heightened global volatility.

“An index fund or ETF tends to outperform most funds in a representative category over the medium- to long-term, because it faces far fewer real-world frictions,” Williams explained. 

“When investors appreciate this, they realise it is far more efficient to gain core exposure through indexation and complement this with truly differentiated non-indexed exposure.”

“Blending only active funds is less likely to deliver a compelling outcome over the longer term.”