Institutional investors are abandoning tolhe Exchange Traded Funds segment of the Nigerian capital market, creating a void that retail investors have stepped up to fill. OLUWAKEMI ABIMBOLA explores how this trend is shaping the market
The Exchange Traded Funds (ETFs) market in Nigeria has been experiencing a shift in recent times, with retail investors taking on a more prominent role. This is due to institutional investors pulling back from this area, which has created a void that retail investors are eager to fill.
Despite this shift, the ETF market in Nigeria is still relatively small compared to other global markets. However, it has been growing steadily, with more ETFs being introduced and trading volumes increasing. Valued at N4.5bn as of May 2017, the ETFs market had grown by 59.33 per cent to N7.17bn as of June 2022.
The Managing Director of Enterprise Capital, Rotimi Fakayejo, in an exclusive chat with The PUNCH, said, “Transaction is still very low in that segment of the market. It is dominated by retail investors because institutional investors have shown no interest in that segment of the market.”
While the latest development is encouraging to issuers and regulatory bodies, market analysts are concerned retail investors may lack the heft to boost the ETFs market and the capital market as a whole.
Worried by this development, stakeholders converged at the Nigerian Exchange’s organised ETFs conference with the theme ‘ETFs in the Nigerian Capital Market: Opportunities and Challenges’ to fashion the way forward for this segment of the market.
According to TipRanks, ETF is a financial instrument that tracks indices or a unique set of stocks in different sectors. ETFs can be purchased or sold on a stock exchange in the same way that a regular stock can.
In Nigeria, there are 12 ETFs listed on the Nigerian Exchange Limited with a market capitalisation of N8.87bn ($19.25m). On the other hand, the South African ETFs market has a cap of $7.11bn.
The Divisional Head of Fund Supervision at the Securities and Exchange Commission, Rabi Maidawa, explained that ETFs are basically classified as specialised funds, which are ordinarily targeted at qualified investors and high net-worth individuals but the commission had allowed the participation of retail investors so as to drive the market.
Speaking at the virtual conference, the Chief Executive Officer of the Nigerian Exchange Limited, Mr Temi Popoola, pointed out that the ETFs market used to be a lot more robust than it is currently.
“There has been a dearth of new ETFs listings on the NGX in recent years. It is incumbent to state that current macro-economic challenges resulting in the exit of foreign investors, impacted the ETFs space, which resulted in a sharp dip in the ETFs market Cap from 2020 highs of N24.5bn,” Popoola said.
He, however, added that four new ETFs will soon be listed on the exchange and expressed a hope that the policies of the incoming administration would be of benefit to the capital market.
From the perspectives of issuers of ETFs, the President of Fund of Managers Association of Nigeria, Aigbovbioise Aig-Imoukuede, said that the lack of investor education had stalled the growth of the ETFs market.
He said, “Many retail investors in the Nigerian capital market are not familiar with ETFs and the benefits and that can make it challenging for issuers to market and promote these products effectively.”
Corroborating Aig-Imoukuede’s stance, the Managing Director of Vetiva Fund Managers Limited, Oyelade Eigbe, stated that investors’ education was a limiting factor.
She said, “What we have noticed is that most of the participants are retail. Funds like this help in providing access to information of institutions like Pension Fund Administrators, to participate more in the use of this instrument, because it forms part of the growth of the market.”
Speaking from the perspective of an investor, the Chief Equity Analyst/CEO of Palesa Capital Markets Associates, Nornah Awoh, opined that the industry regulator, the Securities and Exchange Commission needed to invest more in investor education.
Awoh said, “I think we should start from the point of view of mutual funds that we have had in Nigeria and perhaps that can help one understand why ETFs have not done as well as one would have expected them to do.
“In that regard, I am happy that SEC did recognise its responsibility to investor education but I think it is not something that they want to do in isolation from other market operators because the issuers have a responsibility to educate. It is important that we see SEC play a bigger role in investor education.”
He argued that globally the equities market is not an all-comers game. “Given the size of the listed companies in our environment and given the level of involvement, it is important that the SEC devotes more money, not necessarily in quantum but to value-adding education outlets.”
Another issue that caught the attention of the stakeholders was the liquidity of ETFs. While fund managers saw it as a worrying challenge, to investors, it was a major lure of the ETFs market.
Aig-Imoukuede and Eigbe argued that the issue of liquidity was an operational challenge. Aig-Imoukuede said that compared to other asset classes, the liquidity of the Nigerian ETFs market was relatively low and can create challenges for issuers in terms of managing the creation and redemption process.
“To accommodate investors’ redemption, issuers must be able to buy and sell the underlying assets of their funds and the issuer might need to keep a higher cash buffer on hand to cover future redemptions and if the underlying assets are difficult to sell or illiquid. There can be margin requests for issuers, which lead to a rise in costs.”
Eigbe reasoned, “The depth of the instrument available, especially in the equity market is dependent on the liquidity of the instrument and sometimes, you have challenges in terms of rebalancing, depending on what type of securities are within the index, but it is improving as our market deepens as well.”
However, for the Head of Equities and Alternatives, FBN Quest Asset Management, Laura Fisayo-Kolawole, the liquidity of the ETFs market was a major draw for the investing public.
Expressing excitement at the possibilities, she said, “ETFs for me are game-changers and there are so many factors that drive their popularity. ETFs are changing and evolving. We are seeing the emergence of fixed-income ETFs, ESG ETFs globally.
“One of the benefits of ETFs that I see will be their liquidity and what they mean for investors accessing the market because they are really highly scalable. They offer you easy access in and out of the market. So, if you think of getting exposure to the broad market index of say the NGX ASI, the crude way of doing that will be to go and buy single stocks listed on the index, that is a costly exercise and will take time but you can buy a single stock of the relevant ETF and you have that exposure.”
According to her, it is cheaper and a lot more efficient. “You are not paying transaction charges on individual trades. You are paying that on a single ETF trade.”
On the regulatory challenges, the president of the FMAN said, “ETFs issuers in Nigeria must comply with various regulatory requirements and changes to the rules that change from time to time as are required which can add complexity and cost to the product offering and stiffen the operations of the fund manager. Managing ETFs can be expensive with issuers incurring various costs with portfolio management, market legal compliance and administrative tax.”
However, Eigbe, while stating regulatory concerns, said that the SEC was responsive.
“There is also regulatory burden and costs as well. We are constantly in discussions with the NGX and the SEC on the fees. We are glad that they have open ears and we can obviously improve on this,” she said.
Responding to the issues raised by the fund issuers, Maidawa stated that the issues of liquidity and investor participation were of more concern than regulatory.
She said, “I hear the bane of the development of ETFs and it is the liquidity. It is liquidity that drives this market. Zeroing in on the issue of regulatory concerns as to do with fees. I am glad that Oyelade mentioned that the regulator is open to suggestions and is listening and adhering to market demands because the commission had in the recent past reduced its regulatory fees to the barest minimum.
“According to the commission’s rules, ETFs are basically classified as specialised funds which are ordinarily targeted at qualified investors and high net-worth individuals but the commission has allowed the participation of retail investors so as to drive the market.”
She argued that the major confronting the ETFs market was not regulatory, but the lack of investor education and participation.
Maidawa, meanwhile, urged issuers to explore the use of fintech to drive the participation of millennials and Gen Zs as well as tap into the market provided by Pension Fund Administrators.
“How active are the managers of these funds in the use of fintech to onboard millennials and Gen Zs and also to drive PFAs participation? The regulatory framework is robust and also covers the Pension Reform Act. ETFs are funds that PFAs can fully participate in,” she said.
The issue of greater disclosure was also highlighted. “Our ETF is mostly retail-driven because the participation of QIs and high net-worth individuals is very minimal. So, it is very important that to protect investors that the commission pays attention to disclosure requirements provided in these offer documents. However, the commission does not provide this rigorous review on ETFs targeted at QIs,” Maidawa mentioned.
For the ETF market to deepen, the SEC needs to do a lot of investor education. And For the Nigerian ETF market to catch up with other established markets, such as South Africa, the regulator and issuers need to attract high-net-worth individuals and institutional investors.
