Lessons from Barclays’ ETF venture flop

0
156
Advertisement

By David Onjili

Imagine having a mango, banana, pineapple, avocado and water melon, and eating them in your preferred portions. Now imagine getting all these fruits and blending them and having a cocktail. This is the idea behind Exchange Traded Funds (ETF).

An ETF is a conglomerate of assets that are traded as one, or simply a pooled investment vehicle offering diversified exposure to a particular area of the market. Investors buy shares which represent a proportional interest in the pooled assets.

They track the performance of a basket of shares, bonds and commodities but also ETFs can track a single commodity like oil or a precious metal like gold. There are four known types of ETFs: Index, Equity, Debt and Commodity and physical assets.

Index ETFs may be based on bonds, stocks or currencies and they track the performance of an index by holding its portfolio. Unlike mutual funds, Equity ETFs have their prices adjusted throughout the day rather than at the close of the market day, and are traded as normal shares.

Equity ETFs allow investors to trade in a pool of company stocks that enable the investor to invest geographically (companies from a region) or an industry sector (energy). A commodity ETF, as the name suggests, focuses either on a single commodity holding it in physical storage or even investments in futures contracts, while others track the performance of commodities.

In March 2017, the Nairobi Securities Exchange officially started trading in the Barclays NewGold Exchange Traded Funds (ETF). This is an opportunity for investors within Kenya and indeed the East African region to trade in an instrument that is also listed in the Johannesburg Stock Exchange that tracks on the price of Gold Bullion. ETFs are anchored on the value of the underlying asset they track.

A year on, a number of financial analysts hold that the ETF has performed dismally, when the very aim of it was to allow for diversification, simplicity and access to cheaper option to buying the physical gold; it has not.

An interesting component, specifically of the NewGold Exchange Traded Fund, is that it is Shari’ah Compliant. It is non-interest based and simply trades directly in gold bullion thus conforming to Islamic principles of ethical investing. The issuing company’s only involvement is issuing securities backed by the physical commodity of the relevant debenture and it’s not involved in any activity not permitted under Shari’ah Law.

Questions abound on the success of the NewGold ETFs so far, one of which is liquidity, since only 400,000 shares were listed. That no new shares have been floated since portrays a picture that there’s been little demand for it.

Key to note is that the price is rather expensive. At KES 1200 a share, the NewGold ETF is expensive and quite ironically is odd bearing that its introduction in the market was not just for diversification but also bring affordable products to the market.

As Rufus Mwanyasi of Canaan Capital Limited suggests, NewGold ETF should consider price. It currently is equal to approximately 1/100 ounce of gold held in custody. Changing this to a more affordable rate of say 1/1000 will drop the price from Sh1,200 to Sh120.

While diversification of products is a welcome move, knowledge on the product must always guide investors. For NewGold ETF, the start has not been as buoyant as envisaged. (

LEAVE A REPLY

Please enter your comment!
Please enter your name here