Mitigating your risk with exchange traded funds

It is probable that the expected return from an investment  differs from the actual return. The investor has to contend with two major types of risks-diversifiable and non-diversifiable risk. Some risks cannot be diversified away by holding a portfolio of investments. The investor still has to face the risk associated with the whole economy e.g. exchange rate, interest rate, environmental, legal and inflationary risks. But it behooves the investor to avoid the security-specific risks by holding a diversified portfolio of securities. But oftentimes it is expensive for the investor to hold a diversified portfolio of investments. Exchange Traded Funds (ETFs), like mutual funds, can do the magic. But unlike mutual fund, they may trade at a discount or premium to their Net Assets Value (NAV) per share. NAV is total assets minus liabilities.

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With ETFs the investor is afforded the opportunity of owning part of a portfolio managed by an experienced fund manager for a fee. An ETF could be designed to track equities, government bonds or corporate bonds.  The fund manager aims to replicate the performance of an index by holding a portfolio that is a typical representative of the constituent securities of the tracked index such as S & P 500, Nikkei 225 and DAX.  For ETF that tracks a stock market index, it can hold all the shares or a sample of a stock index or target a specific sector of the stock market.

ETFs are not constantly traded by the fund managers to take advantage of daily movement of the indices. Therefore, the expense ratio of an ETF is often lower than that of an actively managed portfolio of investments. However, they are reappraised at regular time intervals to reflect changes in the composition and weighting of the securities in the benchmark index. ETFs are actively traded on the stock exchange like other stocks or bonds and can be obtained through the stockbrokers.

An astute investor can benefit from investing in ETFs in Nigeria. Although the Nigerian economy dipped 1.5% in 2016, the fundamentals remain strong.  Many stocks are trading at a hefty  discounts to their intrinsic values. The NSE All-Share Index lost 5.1% year to date but has gained 21.6% over the past 5 years.  Unitholders of ETFs are usually exempted from paying taxes on the dividends they receive and capital appreciation upon disposal.

 

LOTUS HALAL EQUITY ETF

It was listed on 14th November 2014 to track the NSE Lotus Islamic Index(NSE LII) of the Nigerian Stock Exchange. NSE LII comprises 15 Shari’ah compliant stocks from five sectors of consumer goods, industrial goods, healthcare, agriculture, oil and gas. It is reviewed periodically in order to ensure that component stocks continue to comply with Islamic principles. Distillers/brewers, tobacco companies, non-islamic banking companies are excluded. It comprises large-cap companies like Dangote Cement, Nestle, Mobil, Dangote Sugar, FO, Mobil ,etc.

Investors have the opportunity to invest without compromising their religious beliefs. The index has lost 24.6% since inception. However, the NSE LII gained  6.5% month on month. It is managed by Lotus Capital Limited.