What is an Exchange Traded Fund and Why Should People Invest in one?

On Monday, Barclays Bank of Kenya launched a new product on the Nairobi Security Exchange tagged New Gold ETF. This was the first ever product to be launched on a Kenyan market as well as the East African region as a whole.

Questions many people have been asking are what it means by an ETF, how it is tied to gold and how one can trade and invest in it and make good returns.

ETFs or Exchange Traded Funds are passively managed index funds that are listed and traded on a securities exchange like the NSE and an ETF tracks performance of and/or gains a broad exposure to a particular index, sector or commodity for individual and institutional investors.

An ETF is an investment vehicle traded on a stock exchange just like one would trade in shares most of which are passively managed index funds which normally rack an index, with their main objective being to participate in the economic growth of an industry sector or commodity such as platinum or gold.

Having understood what an ETF is, what is then the meaning of NewGold ETF? NewGold is an NSE/JSE listed instrument that is structured as a debenture in which each NewGold security is equivalent to approximately 1/100th of an ounce of gold, held in a secure depository on behalf of investors. It offers the opportunity to invest directly in gold bullion.

Barclays Financial Services Limited, the stock brokerage arm of Barclays Bank of Kenya, has been appointed the market maker for the NewGold ETF in Kenya. BFSL is an investment bank licensed by the Capital Markets Authority and was admitted as a trading participant of the Nairobi Securities Exchange (NSE) in 2015. As a trading participant, BFSL is authorized to undertake stock brokerage activities in the NSE.

It is the first financial organisation to introduce ETFs in this market and will serve the larger East African market. BFSL is a subsidiary, fully owned by Barclays Bank of Kenya and therefore a member of the Barclays Africa Group Limited (BAGL) affording it a huge opportunity to leverage on BAGL’s rich capacity to capture key offshore interest in local markets.

Related: Barclays Bank of Kenya Launches Its Gold ETF; What does it mean for the Market?