Exchange traded funds (ETFs) were created in the 1990's by the American Stock Exchange as a flexible and tax efficient alternative to index-tracking mutual funds. Popularity has grown at a rapid pace.

Flexibility. You can buy or sell them instantly, anytime during the business day. No need to wait until the 4 p.m. market close in New York to find out what price you paid or received. What’s more, with a limit order, you can specify the price you’re willing to accept.

• Low cost. Because ETFs follow an indexing strategy they eliminate the need for a hands-on human manager. Result: Virtually all ETFs cost less to run than standard mutual funds with the same investment objective—which could increase your returns by 2% to 5% right out of the gate!

• Variety of indexing strategies. When the first ETF (the famous Spyders, based on the Standard & Poor’s 500) went public in 1993, your field was limited to blue chip stocks. Today, there are more than 200 ETFs covering almost every imaginable sector of the U.S. stock market, as well as bonds, foreign stocks and even gold and the euro.

In November 2000 the first exchange traded fund, the Satrix 40, was established and tracks the JSE ALSI (as it was then) index of the top 40 listed companies on the JSE Securities Exchange.

What exactly is an Exchange Traded Fund?

Briefly, these are baskets of securities which trade just like any other stock. Often, the objective of these baskets is to track well known indices. When you buy a share in such a fund, you are buying the shares that constitute that index. For instance, the three Satrix products listed on the JSE exactly duplicate the indices they track at all times. The main reason for this is because large investors can exchange their Satrix shares at any time for the underlying basket of index shares with the Satrix Manager.

Accordingly, the Satrix manager cannot operate a portfolio that differs from the index constituents. This ensures that the Satrix shares trade at the exact value of the index at all times. This also encourages trading in exchange traded funds by professional investors, such as hedge funds, which are looking for the easiest and most cost effective manner of gaining exposure to an index.

While exchange traded funds behave much like traditional index mutual funds, they have key differences. The main difference is that, unlike mutual funds, they trade on an exchange, just like a stock. However, investing in an exchange traded fund enables you to buy a single stock-exchange listed security that gives you the same return as you would receive if you purchased shares in each of the companies making up that particular index, without the additional costs of buying shares in each of the companies individually.

Traditional mutual funds are priced only once a day, after the market closes, whereas exchange traded funds are priced like stocks, meaning they trade throughout the day.

Compared to mutual funds, exchange traded fund investors generally have the benefits of greater liquidity, including intraday trading, the ability to short sell and buy on margin and have far lower cost structures.

Once you have purchased an exchange traded fund through a stockbroker there are no other costs, no annual management fees, no advisory fees, etc. This liquidity benefit needs to be looked at closely as such funds, such as Satrix, have officially sanctioned market makers, who will always make a price at the index level, whilst the Satrix manager will always trade at the net asset value level. So liquidity, in any size at any time that the JSE is open for trade, is guaranteed. This explains why Satrix securities have the highest liquidity ratios, for their size, of any shares traded on the JSE.

For international investors fixed income exchange traded funds are the preferred option as there is much greater transparency. There are no fixed interest exchange traded funds in South Africa.

Industry experts foresee that these funds will continue to grow, with assets predicted to increase 30% over the next few years, possibly even annually for the next five years.

RHINO ETF has an annual subscription fee of $250.00. For a two year subscription a discounted price of only $400.00.  This includes web site access which details the BUY and SELL recommendations, along with a message board.