Exchange Traded Funds (ETF) can be regarded as the preferred solution to Nigerian millennial challenges associated with picking the right investment stock and managing the changes in share prices alongside their various 9-5 jobs. ETFs are collective investment schemes that pool money from a variety of investors for the sole purpose of investing in a number of financial instruments such as stocks, bonds, oil futures, gold bars, and foreign currencies. ETFs are index funds that track indices in the form of sectors, commodities or assets and they differ from mutual funds in the sense that the former can be traded (sold or exchanges) on the stock exchange whereas the latter cannot.
ETFs according to Russell Investments are regarded as one of the fastest growing instruments in the world. The structure and combinations of this investment scheme vary from country to country. In developing countries like Nigeria, ETFs have grown exponentially between 2011 and 2016 at a compounded annual growth rate (CAGR) of 1900%. Reports denote the fact that Nigeria, as of the end of 2016, had the second highest amount of ETFs (8) in Africa behind only South Africa (74). The Nigerian ETF currently tracks 8 indices listed on the Nigerian Stock Exchange (NSE).
How It Works
ETFs, through their various investment structures (e.g. Vetiva Griffin’s 30 ETF), claim ownership of assets (e.g. NSE Banking Index) and divide ownership of those assets into shares which are then sold to retail and institutional investors. The investors do not have direct ownership of the investment in the fund but are entitled to a proportion of the profits, interest or dividends. Exchange Traded Funds in Nigeria can be open-ended or close-ended. Open-ended funds imply that investors can subscribe to units of the fund at any time while close-ended funds have a fixed amount of outstanding shares available to investors.
Some of the benefits of ETFs include access to professional service at a reduced cost, flexibility in trading, transparency in dealings, and diversified investments.
ETFs prices trade on a daily basis and their prices are determined by stock market. This implies that investors can acquire or trade their shares at a value above or below their Net Asset Value (NAV).
Nigeria’s Sector Indices
The sector indices as supported by allAfrica.com are rebalanced biannually based on market capitalization and liquidity. They consist of the 15 most capitalised and liquid companies in the Insurance and Consumer Goods sectors, the ten 10 most capitalised and liquid companies in the Banking and Industrial Goods sector and the seven most capitalised and liquid companies in the Oil & Gas sector.
The NSE 30 Index
The NSE 30 index tracks the top thirty 30 listed companies and rebalances them based on market capitalization (amount of listed shares multiplies by share price) and liquidity.
The NSE Lotus Islamic Index
The NSE Lotus Islamic Index tracks the performance of Shari’a compliant equities. That is equities of companies that do not deal in prohibited sectors of the economy such as alcohol, tobacco, conventional financial services (such as banks and insurance companies), gambling and adult entertainment. This index comprises of the 15 stocks that have met the eligibility requirements of the Sariah advisory board. The requirements which used to rebalance these companies biannually include market capitalization, acceptable levels of debt, cash and interest income.
The S&P Nigerian Sovereign Bond Index
The S&P Nigerian Sovereign Bond Index tracks the performance of 16 local currency denominated sovereign debt publicly issued by the federal government of Nigeria in its domestic market with maturities from 1-19 years. The index is rebalanced monthly based on new issuance, size and maturity.
The Rand (SA) Price of Gold Index
The rand price of gold is a South African (SA) index with a secondary listing on the Nigerian Stock Exchange and other African stock markets. The index tracks the rand (SA) price of gold and structures the listed instrument as a debenture fully backed by physical gold bullion. Each unit of this listed instrument is equivalent to 1/100th ounces of gold.