ETFs in South Africa: Powerful Building Blocks, Not a Silver Bullet

What Is an ETF?

An ETF is a pooled investment vehicle that holds a basket of assets — shares, bonds, or commodities — and trades on an exchange like the JSE. That means investors get the diversification of a collective investment with the liquidity and tradability of an ordinary share.

A single purchase of one ETF might give you exposure to the 40 largest companies on the JSE, or to more than 1,500 global companies through an MSCI World ETF. That is the power of pooling: instant diversification, without the cost and effort of buying each share individually.

ETFs vs Unit Trusts vs Direct Shares

ETFs are usually compared with unit trusts and with direct share ownership, since all three are ways of investing in markets. Each has a place; the differences come down to cost, flexibility, and how much you want to manage yourself.

A practical example brings the cost difference to life. In a Tax-Free Savings Account (TFSA), with annual contributions capped at R36,000 and a lifetime limit of R500,000, ETFs are often the instrument of choice. A young professional putting R3,000 a month into a global equity ETF inside a TFSA could, over 20 years, build a rand-denominated offshore equity portfolio worth millions — without paying a cent in capital gains tax or dividend tax.

Types of ETFs in South Africa

The South African ETF market has grown rapidly and now covers a wide range of exposures. Local equity ETFs track indices such as the FTSE/JSE Top 40. Global equity ETFs — like the Sygnia Itrix S&P 500 or the Satrix MSCI World — give access to offshore markets without moving money abroad. Bond and cash ETFs provide lower-risk options, while factor or smart beta ETFs tilt towards themes like dividends, quality, or low volatility. Thematic ETFs, focused on areas such as clean energy or technology, are still limited locally but widely available offshore.

Further reading: Should you be buying gold ETFs to take advantage of the surge in price?

Why Aren’t Fund Managers Using More ETFs?

If ETFs are so cost-effective, why don’t institutional managers use them exclusively? The answer lies in how mandates, revenue models, and liquidity work in practice.

Many South African retirement funds operate under Regulation 28, which requires certain exposures and has historically leaned towards unit trust structures. Unit trusts also give managers more flexibility to customise exposures, where a plain ETF is “off the shelf.” And there is the commercial reality: managers earn fees on the assets they actively manage, so outsourcing large portions of a portfolio to ETFs compresses their margins.

This doesn’t mean professionals ignore ETFs. They are widely used as tactical building blocks for quick, cost-effective exposure to broad markets. Most managers prefer a blended approach — layering ETFs with active funds to meet mandates, liquidity needs, and investment views. But the line between “active” and “ETF” is now blurring, which brings us to the most significant recent development in the local market.

The Rise of Active ETFs (AMETFs)

For most of their history, ETFs in South Africa meant one thing: passive, index-tracking products. That has changed. After the JSE amended its listing requirements in 2022 to allow actively managed ETFs (AMETFs), the first products launched in 2023 — and the category has since become one of the fastest-growing segments of the local market. There are now more than 30 AMETFs listed on the exchange.

An AMETF applies an active investment strategy — a manager making ongoing decisions to try to beat a benchmark — while keeping the transparency, liquidity, and intraday tradability that ETFs are known for. In effect, it wraps an active strategy in an ETF shell. This is partly the answer to the question in the previous section: managers who once reached only for unit trusts can now bring active strategies to the JSE in a listed, tradable form.

The trend is global. Internationally, active strategies now account for close to 90% of new ETF launches, and major forecasters expect active ETF assets to grow several times over by the end of the decade. The United States led the way, helped by region-specific tax advantages, but adoption has broadened worldwide — and South Africa is now firmly part of it.

The local roll-call reflects that. Allan Gray, through its Orbis partnership, listed global equity and balanced feeder AMETFs. Ninety One brought multi-asset income strategies to market. Prescient and others have launched Regulation 28-compliant balanced AMETFs — significant for retirement savers, because it means a Reg 28-compliant multi-asset portfolio can now be bought on the JSE like any other share. More specialist products, including thematic strategies, continue to list.

Our view: AMETFs are a genuinely useful addition — but they quietly retire the old shorthand that “ETF equals cheap and passive.” An AMETF carries higher fees than a plain index tracker because you are paying for active management, and the relevant question becomes the same one we ask of any active fund: is the strategy worth the fee, and does it earn its place in the portfolio? The wrapper has changed; the discipline of looking under the hood has not.

Factor Harvesting and Smart Beta

Not all ETFs are created equal. Factor harvesting — often associated with “smart beta” ETFs — aims to capture specific drivers of return that academic research has linked to outperformance over time. Rather than weighting purely by market size, factor ETFs apply transparent, rules-based criteria to tilt towards stocks with particular characteristics. It sits between pure passive investing and active stock-picking, and it usually costs more than a broad-market ETF but less than an active fund (roughly 0.3-0.6% versus 1-2%).

The most well-researched factors include value (cheap relative to fundamentals), momentum (strong recent performance), quality (strong financials and profitability), size (the historical small-cap premium), low volatility (more stable prices), and dividends (consistent income). Locally, examples include dividend-tilted, momentum, and quality ETFs from providers such as Satrix and Sygnia.

Why use factor strategies — and the catch

The appeal is enhanced returns over long periods, some risk management (low-volatility and quality factors can soften drawdowns), and diversification across return drivers, all at a lower cost than active funds. The catch is that factors are cyclical — value can lag in tech-driven markets while momentum can crash in reversals — and factor ETFs can quietly concentrate in particular sectors. They work best as a deliberate tilt within a thoughtfully allocated portfolio, not as a bet that one factor will always win.

When ETFs Perform Well — and When They Don’t

ETFs excel in trending bull markets, where low costs and broad exposure let them beat the average active manager. They also shine in highly efficient markets, like US large caps, where stock-picking rarely delivers consistent outperformance. And in cost-sensitive portfolios, their fee advantage compounds significantly over time.

They can struggle in choppy or sideways markets, where active managers can add value by holding cash or rotating sectors. They also carry concentration risk: the S&P 500, for instance, is heavily weighted towards a handful of mega-cap technology stocks. An investor in a broad US growth ETF isn’t buying an evenly spread basket of 500 companies — they are buying a market dominated by a few giants, and if those falter, the ETF follows.

Currency matters too. When the rand collapsed from around R14 to nearly R19 to the dollar in early 2020, South African investors in offshore ETFs saw positive returns in rand terms even as US markets fell. In 2016 the opposite happened: a strengthening rand eroded dollar-based gains. ETFs don’t hedge this automatically, so investors carry the full effect of currency swings.

Overlap and Hidden Concentration Risk

Many investors assume that buying several ETFs automatically increases diversification. Look under the hood, and that’s often not true. An MSCI World ETF and a Nasdaq 100 ETF appear different on paper, but the same names dominate both — Apple, Microsoft, Amazon, Nvidia. Instead of spreading risk, you may simply be doubling your exposure to US mega-cap technology.

This creates hidden concentration risk. In recent years, a small group of mega-cap technology shares drove a disproportionate share of US market returns, and owning multiple growth ETFs often just meant riding the same wave repeatedly.

The illustration tells the story: over roughly 2020 to 2025, the Magnificent Seven rose well over 200%, the S&P 500 as a whole roughly doubled, and the same index stripped of those seven names rose meaningfully less. Owning broad US ETFs — S&P 500, Nasdaq 100, even MSCI World — often meant leaning on the same narrow group of companies. The lesson isn’t to avoid ETFs; it’s to look past the label at what you actually own. We analyse the underlying holdings so that a portfolio achieves real diversification across sectors, geographies, and asset classes, rather than hidden overlap.

Further reading: How to invest offshore as a South African.

Liquidity, Tax, and Platform Limitations

Are ETFs fully liquid?

ETFs trade on the JSE like shares, so you can buy or sell at market prices throughout the day — more flexible than unit trusts, which price once daily at NAV. In practice, liquidity depends on bid-ask spreads, the size of the ETF, and the liquidity of its underlying holdings. Large funds trade smoothly; niche funds with low volumes may show wider spreads, though authorised participants can create or redeem units to meet demand.

Tax considerations

For South Africans, ETF income and gains are taxed much like unit trusts. Dividends attract a 20% withholding tax, and capital gains tax applies when units are sold at a profit. Offshore ETFs held directly can create foreign estate duty (situs) exposure, but most JSE-listed global ETFs avoid that complication. Wrappers, endowments, and trusts can offer further tax and estate planning advantages depending on your circumstances.

Why some platforms don’t offer ETFs

Not all linked investment service providers (LISPs) make ETFs widely available. Many were built around unit trusts and lack the stockbroking infrastructure for intraday trading; their revenue models also rely on rebates that ETFs don’t pay. As a result, investors on some platforms find themselves limited to curated menus that exclude much of the ETF universe. This is where independence matters — we help clients access the right mix of ETFs, unit trusts, and structures without being boxed in by a platform’s menu.

ETFs in Portfolio Strategy

ETFs are best seen as building blocks. A broad-market ETF like the S&P 500 or MSCI World can form the growth core of a portfolio. Factor ETFs can tilt exposure towards value, momentum, or dividends. Bond ETFs add stability and income, and money-market ETFs can act as a liquidity reserve. Used together, they provide the scaffolding for strategic asset allocation — which research consistently shows is the single biggest driver of long-term returns.

Sequence of Return Risk: The Retiree’s Challenge

Sequence of return risk is the danger that the order of investment returns — not just the average — determines whether a retirement portfolio lasts. Negative returns early in retirement, when you are drawing an income, can permanently reduce your capital base. Even if the long-term average is identical, a poor sequence at the start can cause money to run out years earlier than if the good years had come first. In short: it is not only how much your portfolio earns, but when it earns it.

While ETFs are excellent for long-term compounding, they offer no protection against this risk. Consider two retirees, each starting with R10 million and drawing R500,000 a year, facing the same long-term average return in a different order. The one who hits the worst years first sees their capital fall below R3.5 million within five years and nearly run out within a decade. The one who enjoys strong early years sees their portfolio grow past R20 million over the same five years. Same average return, radically different outcomes — driven entirely by sequence. When you are still saving, volatility is noise; in retirement, it can break the plan.

Managing sequence risk

We blend ETFs with tools that smooth returns and protect income: multi-asset income funds that can tilt defensively, a cash buffer covering three to five years of withdrawals so growth assets aren’t sold at the wrong time, smoothing or structured products that buffer large drawdowns, and low-correlation strategies that diversify return sources. That combination lets retirees keep the cost-efficiency of ETFs while guarding against the destructive power of bad timing.

Further reading: Understanding investment risk and volatility.

Active Funds Still Have a Role

ETFs are powerful, but they don’t solve everything. Active multi-asset funds, hedge funds, and specialist managers still play important roles — particularly for retirees and income-dependent investors. One client came to us with a retirement portfolio concentrated in high-cost active funds. By blending low-cost global ETFs for long-term growth with an active income fund for stability, we cut annual costs by around 0.8% while lowering sequencing risk — leaving the client with broader diversification, lower costs, and a steadier income.

Further reading: The top-performing funds available to South African investors.