Last year, the number of exchange-traded funds (ETFs) worldwide passed the 5,000 mark—a formidable milestone at a time when many new products fail to gather enough assets to really thrive. ETFs are catching on around the world, with increased inflows in North and South America and Europe. One stumbling block that providers have faced, however, has been Africa—particularly South Africa, where a slew of tight regulatory requirements has made it next to impossible for ETFs to gain traction.
According to Deborah Fuhr, the proliferation of ETFs in South Africa has been held back by rules on foreign collective investment schemes, which require a trustee to provide fiduciary control and act as a custodian—all independent of the fund manager. That isn’t what happens with ETFs.
This barrier has put a major crimp in growth prospects for the ETF industry in this African country where the middle class is growing exponentially, along with their wealth and investment needs. The size of South Africa’s middle class has shot from just 115 million in 1980 to 326 million today. And, the African Development Bank believes it could overtake China’s by 2035. Demographics are also pretty favourable with a comparatively young workforce relative to the rest of the world, Fuhr points out.
It’s a population that might benefit from ETFs as wealth management needs expand (not to mention the pension industry in South Africa, which is the 10th largest in the world). Right now, however, investors are limited to what’s on the menu. According to Fuhr, local ETFs have existed in South Africa for 14 years. But no foreign ETFs are cross-listed on the Johannesburg Stock Exchange.
Relaxation of some of these stringent rules would help ETFs take off in South Africa, the second largest economy in Africa after Nigeria (it’s true – this happened last year). And it would have a knock-on effect in other countries. As Fuhr points out, ETF activity is starting to take hold in Africa as South Africa’s ETFs are cross-listed in Botswana, Ghana and Mauritius, and as Nigeria cross-lists its ETFs.