Barclays Launches E. Africa’s First-Ever Gold-Backed Exchange Traded Fund

Barclays Launches E. Africa’s First-Ever Gold-Backed Exchange Traded Fund

Barclays Bank on Monday launched the first exchange traded fund in East Africa when it listed its NewGold ETF on the Nairobi stock exchange, Financial Times reported.

The NewGold exchange traded fund was first listed in South Africa in 2004 and has since been launched in Botswana, Nigeria, Ghana and Mauritius, Xinhua reported.

An exchange traded fund (ETF) is a marketable security that tracks an index, commodity, bonds, or a basket of assets like an index fund. Unlike mutual funds, an ETF trades like a common stock on a stock exchange. ETFs typically have higher daily liquidity and lower fees than mutual fund shares, making them attractive to individual investors, according to Investopedia.

NewGold ETF will be traded at the Nairobi Securities Exchange. Each NewGold security is equivalent to about a hundredth of an ounce of gold that is held in a secure depository on behalf of investors and is backed by physical gold.

“The Kenya shilling ETF will be traded in the same manner as a normal equity security and will be subject to similar tax treatment,” said Kamau Thugge, principal secretary in the National Treasury, in a press conference.

The Nairobi all-share index hit a 47-month low on March 8, driven down by a selloff in Safaricom, the country’s dominant mobile telecom operator, and bank stocks, FT reported. It has since recovered 9.2 percent but is still 2.1 percent down this year.

“It makes sense to be adding complexity to the stock exchange. I think that with the ETF they’re testing the water to see what kind of appetite there is for this kind of thing.” said Aly-Khan Satchu, an investment adviser in Nairobi.

Anthony Kirui, the head of markets at Barclays Kenya, is optimistic about the product’s prospects. “It’s the only ETF in East Africa and it’s going to help market players to diversify their investment risks,” he said.

Barclays is “pushing at an open door” by launching a gold-based exchange traded fund, Satchu said. “There’s clearly demand for gold here because people see it as a store of value.”

This will be the first time Kenyan investors have local currency exposure to the spot price of gold, making it attractive to local pension funds and other institutions that are restricted in the amount they can invest overseas, FT reported. It will also reduce currency risk for those wanting to buy gold.

By owning an ETF, investors get the diversification of an index fund plus the ability to sell short, buy on margin and buy as little as one share (there are no minimum deposit requirements). Another advantage is that the expense ratios for most ETFs are lower than those of the average mutual fund. There’s also potential for favorable taxation on cash flows generated by the ETF, since capital gains from sales inside the fund are not passed through to shareholders as they commonly are with mutual funds, Investopedia reported.

The Kenyan product is a cross-listing of the Johannesburg Stock Exchange’s $1.4 billion NewGold ETF. Initially in Kenya it will be $4.8 million with capacity to expand if there is demand.

One of the best known and traded ETFs, the Spider, tracks the S&P 500 Index. In addition to gold, commodity ETFs track commodity prices including crude oil, silver and natural gas. ETFs track foreign stock market indices for most developed and many emerging markets. Sector ETFs track individual industries such as oil companies, energy, financial companies and biotech.