Investors in traditional index-tracking ETFs looked for exposure to a particular market. For example, for US equities you would buy a tracker of the S&P 500 Index, or if you were looking for government bonds you would buy an ILBI or GOVI tracker. In other words, you would buy individual asset-class building blocks and the onus would be on you to put together a solution to target your particular outcome.
Under the new AMETF legislation, we can design portfolios with a less restrictive mandate. Practically that means, in the context of the Coreshares Income AMETF, we can now put together the total solution for you. In this instance we have a multi-asset income fund that targets a particular outcome and invests across a broad spectrum of asset classes to achieve that outcome.
This is not new – you’ve been able to buy this type of fund as a unit trust for many years. But it's the low-cost nature of ETFs and the on-screen accessibility alongside, let’s say, your share portfolio or your portfolio of other ETF building blocks, that is revolutionary about this product.
With the Coreshares by 10X Income AMETF in particular, the objective is to achieve returns or yield that are similar to what a bond ETF would produce, but at a significantly lower level of risk. We're able to do that by investing across a broad spectrum of fixed-income asset classes, from bonds to cash and short-duration instruments issued by the banks, and a particular part of the market called the credit market, which is effectively corporates issuing debt. That part of the market in South Africa is very hard or impossible to index, so until now one could not have exposure to it in an ETF. We also have unique exposure to global credit across 425-odd companies.
Typically, the investor will be someone looking to diversify their existing portfolio by incorporating the fixed-income asset class or someone who doesn't want to assume high levels of capital risk or volatility but still wants an attractive level of income. The fund targets CPI+2.5% with a current yield around 10%, and the average duration, which is the interest-rate sensitivity of the fund, is around 2.7 years. If you look at a GOVI bond index for example, the yield is higher, at around 11.5%, but the duration is more than double, which means the capital at risk when investing in a government bond index is not to be ignored.
The one key piece of the whole ETF value proposition, which is costs, is something we've packaged up and delivered in this income fund. We have positioned this fund with a management fee of 0.38% pa for the whole solution. In the unit trust world, the average cost for a retail investor is about double that.
The other real benefit is the accessibility and the operational efficiency of having this fund available on screen. In the past, the unit trust market benefitted from many flows that were, in a sense, grudge flows, where participants such as private client securities businesses and wealth offerings had to move out of their ecosystems to buy unlisted funds. Now they can buy them on screen, and that's potentially where you could see a slow-down in flows in the unit trust market and a potential pick-up in the ETF market.
