QUESTION:

Briefly discuss with at least one example, how an Exchange Traded Fund (ETF) can be suitable
in the developing financial markets of East Africa.

Exchange Traded Fund (ETF)

Is a marketable security that tracks an index, a commodity, bonds, or a basket of assets like an
index fund.

In simple terms, ETFs are funds that track indices such as CNX Nifty or BSE Sensex, etc. when
buying shares/units of an ETF, is more of like buying shares/units of a portfolio that tracks the
yield and return of its native index. The main difference between ETFs and other types of index
funds is that ETFs don’t try to outperform their corresponding index, but simply replicate the
performance of the index. Hence, they don’t try to beat the market, they try to be the market
itself.

Unlike regular mutual funds, an ETF trades like a common stock on a stock exchange. The
traded price of an ETF changes throughout the day like any other stock, as it is bought and sold
on the stock exchange. The trading value of an ETF is based on the net asset value of the
underlying stocks that an ETF represents. ETFs typically have higher daily liquidity and lower
fees than mutual fund schemes, making them an attractive alternative for individual investors.

Broad Diversification; because of their broad diversification it protects the portfolio from any
single downturn in the market, since the individual’s money is spread out among these hundreds,
or thousands, of stocks. Therefore, this benefits the developing financial markets in east Africa
by reducing the risk factor in various portfolio investments of individual’s.

But also due to their diversification and don’t require large amounts of capital in order to invest
in a range of stocks, they are good way to get started. One can trade them like stocks while also
enjoying a diversified portfolio, which includes lower risk and less volatility which often makes
a fund safer to own than an individual stock.

However, the ETF compared to mutual fund, ETF is more suitable for the financial markets in
East Africa, because the ETF tend to be more effective and more liquid as they trade on
exchanges like shares of stock, to which some of the ETF’s can make great, tax efficient, long-
term investments.

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