Dr Oluwatobi Oyefeso1

Since after the devastating effect of the global financial downturn in 2008, the regulators of the Nigerian capital market have been seeking ways to diversify investment opportunities and deepen the country’s capital market. This led to the introduction and listing of the Exchange Traded Fund (ETF) at the Nigeria Stock Exchange. Because of the relative newness of the ETF in the Nigerian capital market and the need to educate investors on this product, Dike Onwuamaeze, associate editor of TheEconomy recently spoke with Dr. Oluwatobi Oyefeso, former director general of Nigeria Capital Market Institute and currently Group Chief Executive Officer, Morewits Financial Market Institute & Morewits Consulting  on the prime features of the ETF in a format that would enrich the investment literacy and answer the possible queries of the investing public. Excerpts:

There is presently a new investment instrument called Exchange-Traded Fund (ETF) in Nigeria’s capital markets.  In your opinion, what is the relevance of this new investment product vis-à-vis the effects of the 2008 global financial meltdown?

The effects of 2008 global financial downturn remain indelible in the minds of regulators, policy makers and investors across the global capital markets jurisdictions.  Certainly, the individual national capital market’s endogenous factors contributed to the ferocious level of the 2008 global financial crisis in different capital markets.  For example and focusing on the Nigerian capital markets, the mono-instrument nature of the markets could not have been an over-emphasised contributing factor.  In our capital markets, equity has been the readily available, largely dominant and renowned investment instrument, indirectly remaining the only capital market investment choice for the investing public.  Consequently, the inferno of the financial crisis that wiped-off the enormous values of the equity investment on the Nigerian capital markets, indeed, spread quickly and burnt badly the investment fingers of the investing stakeholders.  My argument is that the financial loss might have been negligible if the investors had several alternatives of the financial instruments and contracts to diversify their investment portfolio.  Possibly, a class of investors might have totally preferred investing in a derivatives contract, such as equity options as a speculation strategy to profit from the volatility of the underlying equity.  Alternatively, and in addition to investing in a particular equity, investors might have entered into derivatives equity options as a hedging strategy to protect against a price fall (bearish trend) of such underlying equity.  So, the introduction of more investment instruments like Exchange-Traded Fund (ETF) in our capital markets should be a welcome portfolio-diversifying opportunity for the investing public.

What is Exchange-Traded Fund all about?

Exchange-Traded Fund (ETF) is a type of Collective Investment Scheme (CIS) which is not new to the Nigerian capital markets.  CIS is an investment vehicle in which the prospective investors are invited to invest money or other assets in a portfolio.  Typical examples of CIS relevant to ETF are Open-End Fund (OEF) and Closed-End Fund (CEF).  In the OEF, units or shares can be issued and redeemed at any time and units are bought directly from the fund manager rather than from the existing unit holders and, the shares are not traded on the stock exchange.  In antithesis, a CEF is a publicly traded investment company investing in a portfolio of securities, like stocks and bonds.  The fund raises a prescribed capital primarily through an Initial Public Offering (IPO) and the phrase ‘closed’ refers to the fact that no more shares or units can be issued to the willing investors after closing the initial offer and the funds.  CEF is not redeemable for cash or securities until the fund liquidates and units can be traded on the secondary market. Now to ETF which is a security that tracks an index, a commodity or a portfolio of assets like an index fund.  ETF can create more shares at any time and can still be traded like a stock on an exchange. Precisely, ETF combines the advantages of the OEF’s possibility of creating more shares at any time and of the CEF’s possibility of trading shares on the exchange that has been explained above.  Succinctly put, ETF is security that closely resembles index funds, but can be bought and sold during trading day and hours similar to equities on the exchange, and it gives investors a convenient way to buy a broad basket of securities in a single transaction which widens diversification opportunities. A current example of an ETF in our capital markets is the Vetiva Griffin 30 ETF (VG30 ETF).  Notably, VG30 ETF is the first equity-based ETF to be listed on the Nigerian stock exchange following the listing of the Newgold ETF in 2011.  The VG30 ETF, as an equity-based ETF, is packaged so that its value would track (or mirror) the price and yield performance of the underlying assets, the Nigerian Stock Exchange 30 Index (NSE 30 Index).

Who can invest in ETF?

Every willing person who is financially able and capable can choose to invest in the ETF.  Notably, a prospective investor does not need huge capital to invest in the ETF. Certainly, ETF is all-comer investment vehicle.  No special qualifications or attributes are required of the investing public to invest in ETF.  So, the investing public in its entirety has the right to invest in such investment instrument.

What is the process of investing in ETF?

The process of investing in ETF is simple.  Prospective investors only need to approach a registered and licensed stockbroker who would give all necessary information about any current ETF in our capital markets and subsequently open account to be able to buy on behalf of their client-investors.  Additionally, the prospective investors are encouraged to seek the professional advice from the SEC’s registered investment adviser(s).

What are the benefits and risks of investing in ETF?

Investing in ETF gives investors the opportunity to diversify into different stocks in the case of equity ETF without actually investing in each underlying stock of the ETF.  Also, investors get the opportunities to trade their ETF shares and recoup their investment’s money during any trading day and time.  Certainly, ETF has risks like other investment instruments.  Mainly, the risks peculiar to investing in individual instruments also affect the ETF from such particular instrument.  For example, the value of equity ETF would be dependent on the value of the underlying portfolio of stocks which the ETF is mirroring.  This is in the case of the traditional ETF which is the type we currently have in the present-day Nigerian capital markets.  An exception to this rule is in the case of the Inverse ETF which is a variant of non-traditional ETFs.  The Inverse ETF is so packaged that its value goes opposite to the value of its underlying portfolio of assets being mirrored.  More practically, and assuming the VG30 ETF discussed above was VG30 Inverse ETF on the NSE 30 Index, the value of such ETF would rise whenever the value of the NSE 30 Index falls.

What are the likely hindrances to the patronage and success of ETF in our capital markets?

Despite the advantages associated with investing in ETF, there is a potential challenge of its low patronage in Nigeria’s capital markets principally because of what I would call the ‘traditional investment syndrome’.  By this, I mean the problem of the Nigerian investors being used to the traditional investment in shares (or equities) giving them the direct opportunities to invest in individual share(s) and to physically see the evidence of their investment in share(s) either through share certificate as the case before the emergence of de-materialization, or through the Central Securities Clearing System (CSCS) statement as the current practice and an outcome of de-materialization.  Consequently, it may take a while for the investing public to embrace investing in ETF as well as its associated losses of investing in shares of their choices and having access to information on the performance of individual shares.

In what ways can ETF investors be protected?

The Securities and Exchange Commission (SEC), the statutory regulator of the Nigerian capital markets, has instituted thorough rules and regulations guiding every investment instrument in the capital markets.  These rules and regulations specify the ‘dos’ and ‘don’ts’ of the capital market operators, just like the rights of the investors are clearly stated.  In effect, there are adequate regulatory rules and regulations guiding all investment vehicles in our capital markets.  However, it is intuitive to state here that every investor has the responsibility to seek professional advice before making investment decision.  Recall: ‘Caveat emptor’ – ‘buyer beware’.

How is the NSE 30 Index selected?

The NSE 30 Index is a basket of the best 30 stocks (or equities) selected based on their prices and volume trade with no sector having a weighting of less than 2 percent and more than 40 percent, while no individual listed equity can have a weighting of more than 20 percent in the basket.  The constituent stocks in the index are subjected to these criteria on a semi-annual basis and rebalanced appropriately.  Also, it is noteworthy that the index is adjusted to account for any Corporate Actions (e.g. splits, dividends, mergers, acquisitions and spinoffs) distributions from the component companies.

I would like to emphasize that the introduction of the ETF is a way to deepen our capital markets as well as giving more investment instrument opportunities to the investing public.  Further, it is believed that the above discourse on the ETF would enhance more wits and skills of the investing public on the ETF.

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