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As inflation remain high, investors can turn to ETFs to protect returns

As inflation remain high, investors can turn to ETFs to protect returns
07-06-23 / Tau kaVodloza

As inflation remain high, investors can turn to ETFs to protect returns

Johannesburg - The South African Reserve Bank (SARB)’s monetary policy committee (MPC) increased the repo rate for the tenth consecutive time by 50 basis points to 8.25%, adding a total of 475 basis points since it started tightening policy in November 2021.

Because interest rates rise in response to high inflation, it may be a challenge for investors to earn real (after inflation) returns in cash investments – even though the interest earned is higher.  Added to this – monetary policy is now restrictive which means that there is a good possibility that we may see rate cuts in the not-too-distant future.

Investors need to look outside of conventional products and consider different asset classes that may offer positive real returns and potentially also benefit from a longer-term decline in interest rates. Looking at bonds and equities and deciding what to invest in may be quite daunting for the average investor. Buying an Exchange-traded funds (ETFs) takes the pressure of picking the correct equity or bond instruments away from the investor.

“ETFs can spread [investor] risk and provide geographic exposure in their portfolios by employing a long-term strategy and a sensible, level-headed attitude. ETFs' accessibility in South Africa has made it simple for anyone to diversify and expand their existing investment portfolio across asset classes and become a global investor," says Sebastian Pillay, Head of Share Investing, FNB Wealth and Investments.

ETFs have further benefits over traditional investments, including lower costs due to their structure and diversification, which allows investors to gain exposure to a wider variety of assets while lowering risks. The low initial investments, makes it simple to invest monthly and accumulate wealth over time.

There are many ETF options on offer today from passive (tracking an index) to the recently available actively managed ETFs (experts pick the instruments). ETFs invest in a variety of securities, including stocks, bonds, and other financial instruments. “Many of these "baskets" are constructed around certain themes or indexes, allowing investors to make a single investment and gain exposure to several securities or financial instruments associated with that investment theme,” adds Pillay.

Additionally, ETFs are often traded on stock exchanges, making it simple and quick to buy and sell them. They are therefore a fantastic choice for investors who need the flexibility to quickly alter and access their portfolios in reaction to changes in market conditions.

FNB currently offers ETFs that provide asset class and geographical diversification:

  1. FNB Top40 ETF

Tracks the performance of the FTSE/JSE Top 40 index, which represents the 40 largest companies on the JSE in terms of market capitalisation.  Some of the companies in the index includes Richemont, Naspers, Prosus, Anglo American, Anheuser Busch, and British American Tobacco.

  1. FNB MidCap ETF

This is the only ETF on the JSE that tracks the FTSE/JSE Mid Cap Index. This index tracks companies outside of the Top 40 index. These are still sizable companies often with a more “South Africa” flare. Top holdings include Discovery, Bidvest, Woolworths, Clicks, Mr Price, Tiger Brands, and Spar.

  1. FNB Global 1200 Equity Fund of Funds ETF

Tracks the S&P Global 1200 Index which includes over 1200 companies across Asia, Australia, Canada, Europe, Japan, Latin America, and United States of America. The largest holdings include Apple, Microsoft and Amazon.

  1. FNB World Government Bond ETF

Aims to track the FTSE World Government Bond Index by investing in the underlying physical bonds and is the only ETF globally which tracks this index that holds 1182 bonds.

  1. FNB Government Inflation Linked Bond ETF

This ETF offers investors a good mechanism to hedge against inflation. Inflation linked bonds pay a coupon above the prevailing inflation rate.

Investors can gain access to these ETFs by opening a FNB Shares Zero account via the FNB App or Online Banking. Shares Zero charges zero monthly fees and brokerage so you can accelerate your long-term portfolio growth.

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