Whilst you wait for the airports to open, do you know your ETNs from your ETFs?

Please note that these blog posts are meant to bring to your attention options you may not be aware of and should not be considered as financial advice or a substitute for speaking to a professional.

foreign investment ETN ETF

We have spoken before about dreaming of foreign shores. Escape fantasies are definitely not strange during these strange times. Perhaps it is the turquoise sea surrounding a tropical island that is mesmerizing you. Maybe it is just plain Perth with its dishrack for an opera house that takes you out of the moment.

It seems as if Crazy Covid mutated and have given fraudsters super grabbing powers in South Africa. We have seen families profiting off political connections. We have heard horror stories of irregular PPE tenders and irregular spending such as many, many millions of Rands wasted on flooring for a make-shift hospital that seems to consist of novel see-through material as no one has seen it…

Let us do a cold reality splash quickly. Then take a deep breath and look at four more realistic options for safeguarding your investments through international exposure.

What your millions are worth

One million South African Rands may buy you 4769 880.15 Afghani in Afghanistan. However, it will only buy you 86 763.81 Australian Dollars or 47 426.00 Pound Sterling. And if you want to move to become Trump’s neighbour, your 1000 000 Rands will only give you 61 973.04 US Dollars. That is of course if you could magically convert the money using only the exchange rate. Various rates and taxes will apply.

It is not just the money you have to worry about. We live quite cheaply over here, though it may not feel like it. We easily braai two or three types of meats on the weekend, have workers in our homes and garden and rarely need to leave our homes to change our minds. (Try changing your mind in a tiny London flat!) They have only 1446 hours of sunshine a year (we have 2500) and traditionally serve jellied eel, toad in the hole or black pudding for supper (the latter is a delightful savoury pudding made from pigs blood mixed with oatmeal!)

I still want to move (at least) my money overseas!

Sometimes we get so stuck bracing ourselves for the bad news and bemoaning everything we do not have that we do not always notice the possibilities we DO have. Consider these four options:

1. Congratulations! Up to 30% of your money may already be overseas

You may have seen asset managers punt some of their products (usually called multi-asset unit trust funds) as being ‘Regulation 28 compliant’. This regulation forms part of the Pensions Act. This act wants to protect you through its guidelines on diversification of assets. It gives a recipe to the asset managers as to how to bake a well-balanced, fragrant (but not too spicy) investment pie by indicating which asset classes they should use.

The investments underlying the investment portfolios of Retirement Annuities (Referred to as Ras) and Regulation 28-compliant unit trusts are limited to exposures of

    • 75% in equities, whether in South Africa or abroad

    • 25% in local or international property

    • 25% in foreign investments, excluding Africa

    • 5% in investments in Africa (outside South Africa)

So, you already have offshore exposure with any Regulation 28 investment! Should the JSE crash, a Regulation 28 investment will offer more protection than you realise.

2. You and yours may move R 1 million every year across to foreign shores

You, the miserable Missus, your flaky son who has spent the last 2 decades ‘finding himself’ on your account and your sullen, nocturnal grandchild who just scraped through Matric, can each send R1 million offshore as a combined transfer. You can do this once in a calendar year, without having to apply for a Foreign Tax Clearance Certificate. You can invest it in anything from an incense factory in Bombay to Royal Doulton figurines, to black daggers from Bangladesh… it would be sad, but you could if you wanted to.

3. Maybe you are a smaller fish but want to swim with the big fishes but without quite so much risk?

Do not worry! In 2006 a new type of asset class was created called Exchange Traded Notes (ETN for short). These are products that work comparable to bonds. It boils down to you lending the financial institution money. They use this to buy shares and then pays you according to how well that share fares in the market.

FNB has launched ten new ETNs in October 2020. They are registered in South Africa, but track shares which are listed abroad. These are not small fry companies. They include:

    • Netflix
    • Tesla
    • Alphabet
    • Amazon
    • Facebook
    • Microsoft
    • MSCI World index

Remember, you will never hold the share in your virtual hands. You have bought yourself a chunk of the bank’s debt – the bank promises to pay you back, with interest, when you sell.

There are typically two ways in which you can invest – either in terms of how well the share does in the market, without taking into consideration what is happening with the Rand/US Dollar exchange rate and how this influences the share price or with the currency volatility factored in. It is best to ask your financial advisor who understands your circumstances, the product and your ‘risk appetite’ to advise you on the best options for you.

Additional benefits

    1. You can buy and sell the debt notes as you please, without penalties for selling before the due date.
    2. You will only pay long-term capital gains tax (tax on the amount of profit you have made from your investments) which generally is lower than other forms of taxation.
    3. You do not carry the risk of owning the shares yourself. The entity you lent the money to still needs to pay you what they borrowed from you, though that may be all you get back.
    4. Investing in ETNs is much cheaper than attempting to buy a share in the really big companies solo – you may need thousands of Rands just for one (or a percentage of one) share.
    5. You invest in Rands. The bank buys the ETNs in Dollars. Let them deal with the Foreign Exchange!
    6. It does not affect the R1 million that you can invest offshore.

Potential downsides

    1. The risk is that the bank might go bankrupt and won’t be able to pay you back. This can happen. You agree to this, so you will have to cut your losses and move on. This is why it is important to know the credit rating of the institution.
    2. While FNB says you can buy an ETN for as little as R10, it is not quite as amazing as it sounds. You will pay fees that will erode the value of that R10. You will pay for the opening of an account. You will also pay a purchasing fee and so on. This means that you will only start to make money once the remaining balance (after all the deductions) has made up the shortfall and returned to the original amount you invested. In real terms, this means that you need quite a bit more than R10 to make a significant amount of money.

4. But I want my share of shares!

Fear not! Exchange Traded Funds (ETFs) can save the day!

ETFs are ‘baskets of securities’ (any combinations of proof of ownership which can include things like property, shares and bonds that has been given a value and which can be traded).

Unlike ETNs, you are not lending the bank money to buy shares, you are investing directly in shares or part of shares. You buy into a ‘basket of securities’ alongside others. In doing so you are buying into a diversified portfolio that can weather fluctuations better.

This is an older line of products, is better known, and has a much broader market.

Benefits

    1. They are cheaper than local and international Unit Trusts
    2. You can buy a share or a fraction of a share
    3. Because you are buying into a ‘basket of assets’ you reap the benefits of investing in that larger portfolio all at once
    4. It allows you access to shares which you otherwise would have had to have a hefty sum of money for, should you wish to make a purchase.
    5. As with ETNs you will receive an ITC13 tax certificate and be subject to Capital Gains Tax.

Downsides

    1. Market volatility – you bear the risk of the asset losing value
    2. Trading fees – every time you buy and sell, you will pay a commission fee. This can eat into your profitability, especially when you engage in active management of the portfolio.

Final words

Take heart! There are more options than you may realise! We strongly urge you to speak to your Financial Advisor before making any drastic decisions. Do your homework! Make sure you understand all the components of the product. Compare service providers. Read reviews.

Always remember – this, as any investment, should form part of a holistic financial plan that takes into consideration your short, medium, and long-term available resources, needs, opportunities, responsibilities, and priorities.

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