The proposed introduction of the Wall Street Africa (WSA) Banking Index Exchange Traded Fund (ETF) on the Nairobi Securities Exchange(NSE) is an important development for our capital markets.
Beyond introducing another investment product, ETFs provides investors with an alternative way of participating in the growth of Kenya’s banking sector without necessarily having to purchase shares in individual banks.
However, before considering this investment, it is important to understand what an ETF is, how it operates, how investors make money from it and whether it is suitable for their investment objectives.
What is an ETF?
An Exchange Traded Fund (ETF) is an investment fund that pools investments into a basket of underlying assets and issues units that investors can buy and sell on a securities exchange.
Think of it this way.
Suppose you want exposure to Equity Group, KCB, Co-operative Bank, Absa, NCBA, I&M and other listed banks.
Ordinarily, you would have to purchase shares in each of these companies individually. This requires you to analyse each bank, determine how much capital to allocate to each and execute separate transactions.
An ETF simplifies this process.
Instead of purchasing all these shares individually, you purchase units in one investment fund that already holds the underlying shares.
Essentially, you own units in a fund whose value is derived from the combined performance of the shares held within it.
This is what makes ETFs attractive: diversification, convenience and access to a particular market, sector or asset class through one investment instrument. One of the initial challenges facing ETFs on the NSE was liquidity, with investors raising concerns about the ease of buying and selling units, particularly when market participation was relatively low.
However, the market has gradually evolved. Investor exposure to ETFs has increased, participation has broadened and the numbers have improved. We are also seeing a more developed investment ecosystem, supported by increased investor awareness, new market entrants and additional securities listings.
Looking at the experience and available market data from previous ETF introductions and stock listings on the NSE, there is reason to be constructive about the prospects of this new product, particularly for long-term investors.
As participation grows, market depth improves, creating a better environment for ETF trading. Increased participation also gives market makers a broader pool of investors to serve, although actual liquidity will ultimately depend on trading activity, bid-ask spreads and the effectiveness of market-making arrangements.
What do we expect at listing and going forward?
Expectations are that there is no anticipation of significant volatility simply because the ETF is being introduced to the market. Unlike an IPO, where initial demand and supply dynamics can create considerable price movements, an ETF derives its value primarily from the underlying securities it holds.
Investors expect its growth trajectory to be more gradual, largely reflecting the performance of the underlying banking shares, dividend income retained or distributed by the fund, and the overall development of investor participation.
This does not mean the ETF cannot experience price fluctuations. Banking stocks themselves are exposed to market sentiment, interest-rate movements, asset quality concerns and broader economic conditions. These will inevitably influence the ETF’s performance.
The broader expectation is that the product will be more suitable for investors approaching it with a long-term investment horizon rather than those looking for quick listing gains.
The development of the ETF market on the NSE is an encouraging sign of growing market sophistication. As investor participation expands and liquidity improves, ETFs should become increasingly useful instruments for portfolio construction, diversification and long-term wealth accumulation.
The opportunity is not necessarily in trying to make money immediately after listing, but in understanding the underlying assets, acquiring exposure at reasonable valuations and allowing time for the investment thesis to play out.
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