The evolution of financial markets is often shaped by regulatory reforms, which can either accelerate or hinder growth. A prime example is the Exchange-Traded Fund (ETF) market, where regulatory adjustments have played a crucial role in determining the pace of expansion. While the U.S. ETF market has flourished due to favourable tax treatment, South Africa’s ETF sector has experienced a more gradual trajectory, influenced by exchange control policies. However, recent amendments to the Johannesburg Stock Exchange (JSE) listing requirements could mark a turning point, unlocking new growth opportunities for investors and asset managers alike.
South Africa’s regulatory framework for ETFs
Since 2005, South Africa has had its own regulatory trigger that could have impacted ETF growth. ETFs structured as Collective Investment Schemes (CIS) have been subject to different exchange control (Excon) treatment compared to traditional CIS funds. Specifically, ETF managers have been permitted to invest 100% of their assets offshore, whereas traditional CIS funds were limited to allocating only 45% of overall retail assets to foreign investments.
While ETFs that track foreign assets are still considered foreign from a prudential limits perspective, there are no restrictions on how much retail investors can allocate to these ETFs. This fundamental difference in treatment has shaped the landscape of South African capital markets.
Rationale for favourable Excon treatment of ETFs
The South African National Treasury, which sets exchange control policies, introduced this Excon relaxation in 2005 with the goal of expanding market capitalisation, enhancing liquidity on the Johannesburg Stock Exchange (JSE), and promoting foreign diversification through domestic investment channels. The South African Reserve Bank (SARB) also supported this initiative, as the JSE’s daily reporting of ETF flows aids in policy formation from a Balance of Payments perspective. In contrast, traditional CIS funds report foreign flows only on a quarterly basis.
This preferential treatment was intended to drive growth in the South African ETF market. However, the expected expansion has been slower than anticipated. One key reason is the dominance of active management in South Africa and historical JSE listing requirements restricting ETFs to passive index-tracking strategies. Traditional asset managers have been reluctant to embrace index tracking ETFs, thus limiting their uptake in the institutional market.
New JSE listing rules for Actively Managed ETFs
In a landmark regulatory change, the JSE amended its listing requirements at the end of 2022 to allow for Actively Managed ETFs (AMETFs). This development has sparked significant interest from active fund managers wishing to list AMETFs, including for portfolios that reference foreign assets.
For the first time since 2005, all ETFs—whether actively managed or index-tracking—now operate on a level playing field. Given the natural investor demand for foreign diversification, this regulatory shift is expected to fuel ETF growth, leading to increased listings on the JSE and improved liquidity. Moreover, this development will generate more onshore fee income from foreign investments, further strengthening the South African financial ecosystem.
Expected impact of AMETF listings
The introduction of AMETFs and their favourable Excon treatment is poised to be a game-changer for South Africa’s ETF market. As more ETFs become available, their utility will become better understood, encouraging broader adoption by investors.
These changes align with the original objectives set by the National Treasury—enhancing capital markets, promoting foreign diversification through local investment vehicles, and fostering higher savings rates. Crucially, this will all occur without negatively affecting South Africa’s Balance of Payments, as these investments are denominated in rand and will revert to the local economy when investors liquidate their holdings.
With regulatory barriers lifted, South Africa’s ETF market is now better positioned to align with global trends, paving the way for sustainable expansion and increased investor participation.
