All You Need to Know About EFT Investments in Kenya

It is that time of the year when everyone is setting ambitious financial goals. Investing is one of the most effective ways to achieve these goals and build a pathway toward financial independence. Among the many investment options available, Exchange-Traded Funds (ETFs) have become increasingly popular for investors globally.  

What are ETF investments?

Exchange Traded Funds (EFTs) is a defined listed investment product that tracks the performance of a particular index or a basket of various assets. These underlying assets are traded on stock exchanges just like ordinary shares. The price of an EFT determines its demand and supply.

EFTs can either be domestic or offshore, allowing you to access both local and international markets. Generally, they offer you an opportunity to diversify your portfolio at lower costs while still enjoying greater liquidity compared to traditional mutual funds.

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ETFs Available for Kenyan Investors

The concept of EFTs is relatively new in Kenya. According to the East African, NewGold, the pioneer ETF in Kenya’s financial market, was launched in 2017. Since then, ETF trading volumes have gradually increased, with the Capital Markets Authority (CMA) reporting 18% growth in 2022.

The NewGold ETF, a commodity ETF that tracks the price of gold, provides Kenyan investors with exposure to this precious metal without the high costs associated with owning physical gold. Gold is considered a safe-haven investment, particularly during periods of market instability.

Kenyan investors looking to diversify their portfolios with foreign Exchange Traded Funds (ETFs) can trade through local financial platforms. Notable avenues include:

• Hisa App: A mobile platform offering over 6,000 financial instruments, including ETFs. It allows Kenyans to invest in U.S. stocks and ETFs directly from their smartphones.
• Scope Markets: A broker regulated by the Capital Markets Authority (CMA) that provides access to ETFs from major global companies listed on foreign exchanges.
• FXPesa: Another CMA-regulated platform offering premium online access to ETFs.

Additionally, brokers can facilitate access to foreign ETFs, making it easier for investors to participate in international markets.

Here is a list of top-traded ETFs, along with their ticker symbols and prices as of January 13, 2024, as reported on Yahoo Finance:

• SPDR S&P 500 ETF Trust (SPY): Tracks the S&P 500 Index, representing 500 of the largest U.S. companies across various sectors. Price: $580.04 (Ksh74,825)
• Invesco QQQ Trust (QQQ): Reflects the Nasdaq-100 Index, which includes 100 leading non-financial companies on the Nasdaq, with a focus on technology. Price: $504.31 (Ksh65,055)
• iShares MSCI Emerging Markets ETF (EEM): Provides exposure to large and mid-cap companies in emerging markets like China, India, Brazil, and South Korea. Price: $40.79 (Ksh5,261)
• Vanguard Total Stock Market ETF (VTI): Covers the entire U.S. equity market, including large, mid, small, and micro-cap stocks. Price: $287.71 (Ksh37,114)
• iShares Core US Aggregate Bond ETF (AGG): Offers broad exposure to the U.S. investment-grade bond market by tracking the Bloomberg Barclays US Aggregate Bond Index. Price: $95.84 (Ksh12,376)
• Vanguard FTSE Developed Markets ETF (VEA): Represents stocks from developed markets outside the U.S., spanning large, mid, and small-cap companies. Price: $47.39 (Ksh6,113)
• iShares Russell 2000 ETF (IWM): Tracks the Russell 2000 Index, providing exposure to 2,000 small-cap U.S. companies. Price: $217.47 (Ksh28,053)
• Financial Select Sector SPDR Fund (XLF): Focuses on financial companies within the S&P 500, including banks, insurers, and other institutions. Price: $47.67 (Ksh6,150)

Before investing, it is essential to conduct thorough research and consider consulting a financial advisor. This will help you understand the associated risks and ensure your investments align with your financial goals.

Types of EFTS

Index EFTs

Most EFTs are designed as index funds and aim to mirror the performance of a specific index. They are often based on various asset classes such as stocks, bonds, commodities or currencies. To track performance of an index, they hold its contents or a sample of the securities in the index.

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Bond EFTs

As the name suggests, this type of EFTs invest in bonds. Bonds are generally considered more stable than other investment classes. During economic recessions, investors shift their money from the stock market to bonds. As a result, bond EFTs tend to perform well during these periods.

Commodity EFTs

They invest in commodities such as natural resources, agricultural goods or precious metals.

Stock EFTs

A stock exchange traded fund, was the first and most popular type of EFT. These funds track a collection of stocks, respecting a specific industry or an entire equity index.

Why invest in EFTs

Diversification

As an investor, you understand the importance of ‘not putting all your eggs in one basket’. EFTs expose you to a wide range of securities. This helps spread risk and maintain a balanced investment portfolio.

Lower Costs

Typically, EFTs tend to have lower expense ratios compared to other investments. This translates to higher returns in the long run.

Liquidity and Flexibility

EFTs are traded on the NSE; therefore, you can easily buy or sell them throughout market hours. The market is open Monday to Friday 8:00 am to 5:00 p.m.

Transparency

EFT holdings and values are disclosed on a daily basis. As an investor, this allows you to understand what assets they hold and make informed decisions.

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Challenges of Investing in EFTS in Kenya

Limited choice

The EFT market is relatively new in Kenya. The number of EFTs listed on the NSE is quite limited compared to other developed markets. This restricts the ability of an investor to diversify their portfolio.

Market Volatility

Investments are subject to market risks; EFTs are no exemption. The Kenyan market faces political instability and economic fluctuations that are likely to affect returns generated from EFTs.

Currency Risk

As earlier discussed, most EFTs invest in both local and international assets. Therefore, currency fluctuations against the Kenyan Shilling impacts their gains.

Steps to start investing in EFTs in Kenya

Open a brokerage account

Similar to other investments, you need a brokerage account to invest in EFTs. Choose a reputable broker with a proven track record and reasonable fees.

Understand Tax Implications

According to the NSE, EFTS are exempted from Capital Gains Tax upon sale. However, if the EFT pays dividends, these are subjected to withholding tax. The withholding tax is 5% for residents and 10% for non-resident investors.

Stay Abreast with Market Trends

Stay up to date with financial news, economic indicators and political events. These are likely to determine the performance of EFTs. It is important to evaluate your risk appetite before you invest. Start small and scale up over time to minimize risk.

Wrapping Up

The ETF market in Kenya is still in its early stages and faces significant regulatory hurdles, which have slowed the introduction of new products. Nevertheless, both the Nairobi Securities Exchange (NSE) and the Capital Markets Authority (CMA) have committed to fostering market growth. With its untapped potential, the ETF market offers promising opportunities for investors aiming to diversify their portfolios and access new growth sectors. As regulations evolve and more ETF products become available, the possibilities for strategic investment are set to expand considerably.