‘ETFs require structural support’

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ZIMBABWE’S capital market, in its current state, lacks the depth required to support the introduction of Exchange Traded Funds (ETFs), local market analysts have warned.
The Zimbabwe Stock Exchange (ZSE) this month announced that it is now able to receive applications for listing of ETFs and Exchange Traded Notes after obtaining necessary approvals from the Securities and Exchange Commission of Zimbabwe.
An ETF is an investment entity that offers investors a proportionate share in a portfolio of shares, bonds, commodities, currencies or other securities. They are traded on a stock exchange like ordinary equity.

Mutandani Makuyana, Invictus Securities Zimbabwe’s head of research told The Financial Gazette last week, that the new products would bring “diversification” and unlock fresh liquidity to the market, once the landscape is properly readied.
“Even though the ZSE has considered the supporting regulatory and infrastructure framework to be satisfactory, the market currently lacks requisite depth to uptake and assimilate the new product offerings,” said Makuyana.
“Other supporting sub markets such as commodity exchanges, bond markets and derivatives markets would be key for providing the diversity necessary for establishing ETFs”.
“Also, due to constrained liquidity on our capital market, there might be slow uptake and the ZSE will have to be aggressive in providing the market with training and information to induce uptake of such products”.
Enock Rukarwa, a local investment analyst said the prevailing inflationary environment presents a firm challenge in creating demand for hedge instruments like equities.
“Initial uptake will be very thin in the short to medium term withstanding that the product is new and risk aversion profiles with most of our wholesale investors.
“Like with any innovation, the market will never be sufficiently ready and issuers have to stomach decisional and implementation lags.”
According to the ZSE prospective Exchange Traded Product issuers will have to prove that the underlying asset or security tracked is sufficiently liquid to satisfy the exchange such that there will be proper price formation in the product.
Meanwhile, government, which is desperate for funding solutions in the capital-strapped economy, has thrown its weight behind idea.
“There is no reason why we cannot have ETFs to raise capital like they do in Botswana,” Finance minister Mthuli Ncube said recently at a business conference.
Business and the government have both been finding it difficult to source capital due to the country’s economic crisis — characterised by raging inflation.
ETFs would offer investment alternatives and more liquidity on the stock market.
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