Kopano Bolokwe
It is almost 30 years since the world’s first Exchange Trade Fund (ETF) launched in Canada in 1990.
Today, this passive investment product has become one of the fastest-growing offerings in the investment management business. In Botswana, it has been a decade and two years since the first ETF listed on the BSE. At the time, BSE became the first stock exchange in Africa to list ETFs outside of the Johannesburg Stock Exchange (JSE).
Undoubtedly, ETFs have improved the investment landscape on the BSE, adding the much-needed diversification of issuers, instruments, geographies and underlying securities. Currently, there are 7 ETFs listed on the BSE. During the journey to expanding the ETFs on the Exchange, we have achieved several milestones. For example, in 2021, the BSE listed 3 ETFs, a feat never achieved in any given year. It was also the diversity in terms of the underlying securities that those ETFs brought and the geographic exposure that was worthy of note. These were the New Palladium ETF, the AMI Big50 ex. South Africa ETF (BAMIB50) and the S&P African Sovereign Bonds ETF (BASBI).
The New Palladium ETF came at a time when the world was grappling with the undersupply of the precious metal and heightened demand from stringent emission legislation in the automotive industry. The BAMIB50 offers exposure to the top 50 primary listed companies in various African countries except for South Africa and thus provides exposure to Africa’s growth potential and attractive valuations in Africa’s equity markets.
For an investor in Botswana, the ETF gives access to sectors which are not present on the BSE, such as Oil and Gas, and Healthcare. In addition, the above EFT also helps with expanding the constituents of sectors already represented on the BSE in countries such as Egypt, Morocco, Kenya, Mauritius, Nigeria, BRVM and Tunisia, to mention but a few. Notably, 2021 was a tremendous year for Africa’s equity markets, noted by the 21% rise (in USD terms) in the FTSE ASEA Pan Africa Index ex. South Africa. The BASBI, a fixed income ETF, gives access and exposure to hard currency sovereign bonds denominated in Euros, Japanese Yen and the US Dollar from African countries with a credit rating above B-. Thus, the ETF comprises underlying bonds from countries including Egypt, Ghana, Kenya, Morocco, Namibia, Nigeria and South Africa.
The reception of ETFs in Botswana has been phenomenal, with the total value traded since the first listing amounting to P2.5 billion. In comparison to regional markets, the BSE has performed very well. A 2022 study conducted by the BSE comparing ETF performance on the BSE to that of the Namibia Stock Exchange (NSX) and the Stock Exchange of Mauritius (SEM) over the 2017-2021 period showed that in overall, the BSE performed better than the two markets for three consecutive years of 2017-2019, on account of the average volume per listed ETF despite having the lowest number of ETFs over that period. Much of the attractiveness of the BSE relative to peers is due to listed ETFs being granted Local Asset Status (LAS), a status that enables these ETFs to be considered local assets despite the domain of the underlying securities for purposes of the domestic allocation portion of the pension funds.
The year 2022 has equally been exceptional with the historic cross-listing of the African Domestic Bond Fund (ADBF) ETF on 15 September 2022. The ADBF EFT is the first multinational fixed income exchange-traded fund in Africa. The African Development Bank (AfDB) launched it as part of initiatives to strengthen African economies by reducing their dependency on foreign-currency-denominated debt, increasing the range of available financing options, and acting as a catalyst for regional market integration. The Fund replicates the African Development Bank Bloomberg African Bond Indices (ABABI), a family of bond indices that tracks ten countries and represents roughly 90% of the total stock of outstanding African local-currency bonds. ABABI, administered by AfDB and calculated by Bloomberg, was developed to improve liquidity in local capital markets and serve as a benchmark for investors in African currencies.
The indices also provide a strategic tool to better the market infrastructure of the African bond markets. The ADBF ETF is heralded as a critical instrument in showcasing the potential of African bond markets, especially from a data and return perspective. During the listing of the ETF on the BSE, MCB Mauritius, the ETF Manager and Market-Maker, highlighted that the ETF pays a semi-annual dividend which ranges between 8 and 10% in USD terms and has shown attractive return potential, beating its peers with lower volatility since its inception. The ETF is primarily listed in Mauritius since 2018, and Botswana is the second country it is cross-listed. Backed by a $46 million fund, the ETF currently provides exposure to bonds from ten African countries, including Botswana.
Generally, the strategy to diversify product offerings on the BSE has gained momentum. There is a significant investment by the BSE in promoting the comparative advantages of the local market, cultivating literacy about ETFs, making the regulation and the cost of listing and trading competitive and showcasing the absorptive capacity of the local market in terms of the capital that can potentially flow into these ETFs. Similarly, there are indications that investors are receptive to instruments that offer exposure to offshore markets without the inconvenience of having to open accounts offshore and pick individual securities, as well as incur ongoing costs of custody and other administrative functions. More especially that these instruments are considered local assets.
Against this background, there are several issuers that the BSE is pursuing to cross-list more ETFs that will expand the reach of the underlying that are already on the BSE. In the current strategy, the BSE is targeting 11 ETFs by the end of 2026. Given the ramp-up of the BSE’s internationalisation strategy and the lobbying capacity of the Exchange to foster a conducive legislative environment for ETFs, this is a reasonably achievable target.
*Kopano Bolokwe is Head of Product Development, Botswana Stock Exchange
It is almost 30 years since the world’s first Exchange Trade Fund (ETF) launched in Canada in 1990.
Today, this passive investment product has become one of the fastest-growing offerings in the investment management business. In Botswana, it has been a decade and two years since the first ETF listed on the BSE. At the time, BSE became the first stock exchange in Africa to list ETFs outside of the Johannesburg Stock Exchange (JSE).
Undoubtedly, ETFs have improved the investment landscape on the BSE, adding the much-needed diversification of issuers, instruments, geographies and underlying securities. Currently, there are 7 ETFs listed on the BSE. During the journey to expanding the ETFs on the Exchange, we have achieved several milestones. For example, in 2021, the BSE listed 3 ETFs, a feat never achieved in any given year. It was also the diversity in terms of the underlying securities that those ETFs brought and the geographic exposure that was worthy of note. These were the New Palladium ETF, the AMI Big50 ex. South Africa ETF (BAMIB50) and the S&P African Sovereign Bonds ETF (BASBI).
The New Palladium ETF came at a time when the world was grappling with the undersupply of the precious metal and heightened demand from stringent emission legislation in the automotive industry. The BAMIB50 offers exposure to the top 50 primary listed companies in various African countries except for South Africa and thus provides exposure to Africa’s growth potential and attractive valuations in Africa’s equity markets.
For an investor in Botswana, the ETF gives access to sectors which are not present on the BSE, such as Oil and Gas, and Healthcare. In addition, the above EFT also helps with expanding the constituents of sectors already represented on the BSE in countries such as Egypt, Morocco, Kenya, Mauritius, Nigeria, BRVM and Tunisia, to mention but a few. Notably, 2021 was a tremendous year for Africa’s equity markets, noted by the 21% rise (in USD terms) in the FTSE ASEA Pan Africa Index ex. South Africa. The BASBI, a fixed income ETF, gives access and exposure to hard currency sovereign bonds denominated in Euros, Japanese Yen and the US Dollar from African countries with a credit rating above B-. Thus, the ETF comprises underlying bonds from countries including Egypt, Ghana, Kenya, Morocco, Namibia, Nigeria and South Africa.
The reception of ETFs in Botswana has been phenomenal, with the total value traded since the first listing amounting to P2.5 billion. In comparison to regional markets, the BSE has performed very well. A 2022 study conducted by the BSE comparing ETF performance on the BSE to that of the Namibia Stock Exchange (NSX) and the Stock Exchange of Mauritius (SEM) over the 2017-2021 period showed that in overall, the BSE performed better than the two markets for three consecutive years of 2017-2019, on account of the average volume per listed ETF despite having the lowest number of ETFs over that period. Much of the attractiveness of the BSE relative to peers is due to listed ETFs being granted Local Asset Status (LAS), a status that enables these ETFs to be considered local assets despite the domain of the underlying securities for purposes of the domestic allocation portion of the pension funds.
The year 2022 has equally been exceptional with the historic cross-listing of the African Domestic Bond Fund (ADBF) ETF on 15 September 2022. The ADBF EFT is the first multinational fixed income exchange-traded fund in Africa. The African Development Bank (AfDB) launched it as part of initiatives to strengthen African economies by reducing their dependency on foreign-currency-denominated debt, increasing the range of available financing options, and acting as a catalyst for regional market integration. The Fund replicates the African Development Bank Bloomberg African Bond Indices (ABABI), a family of bond indices that tracks ten countries and represents roughly 90% of the total stock of outstanding African local-currency bonds. ABABI, administered by AfDB and calculated by Bloomberg, was developed to improve liquidity in local capital markets and serve as a benchmark for investors in African currencies.
The indices also provide a strategic tool to better the market infrastructure of the African bond markets. The ADBF ETF is heralded as a critical instrument in showcasing the potential of African bond markets, especially from a data and return perspective. During the listing of the ETF on the BSE, MCB Mauritius, the ETF Manager and Market-Maker, highlighted that the ETF pays a semi-annual dividend which ranges between 8 and 10% in USD terms and has shown attractive return potential, beating its peers with lower volatility since its inception. The ETF is primarily listed in Mauritius since 2018, and Botswana is the second country it is cross-listed. Backed by a $46 million fund, the ETF currently provides exposure to bonds from ten African countries, including Botswana.
Generally, the strategy to diversify product offerings on the BSE has gained momentum. There is a significant investment by the BSE in promoting the comparative advantages of the local market, cultivating literacy about ETFs, making the regulation and the cost of listing and trading competitive and showcasing the absorptive capacity of the local market in terms of the capital that can potentially flow into these ETFs. Similarly, there are indications that investors are receptive to instruments that offer exposure to offshore markets without the inconvenience of having to open accounts offshore and pick individual securities, as well as incur ongoing costs of custody and other administrative functions. More especially that these instruments are considered local assets.
Against this background, there are several issuers that the BSE is pursuing to cross-list more ETFs that will expand the reach of the underlying that are already on the BSE. In the current strategy, the BSE is targeting 11 ETFs by the end of 2026. Given the ramp-up of the BSE’s internationalisation strategy and the lobbying capacity of the Exchange to foster a conducive legislative environment for ETFs, this is a reasonably achievable target.
*Kopano Bolokwe is Head of Product Development, Botswana Stock Exchange
