Niki Giles|Published
If you’re thinking about investing for the first time, you’re already ahead of the curve. For many South Africans, the hardest part of investing is getting started. The terminology feels unfamiliar, the choices overwhelming, and the fear of making a mistake can be enough to keep people on the sidelines. Yet building long‑term wealth doesn’t require complex strategies or perfect timing. In fact, for new investors, one of the most effective approaches is also one of the simplest: investing regularly into exchange‑traded funds, or ETFs, through a Tax‑Free Savings Account (TFSA).
An ETF is an investment product that trades on the stock exchange like a share, but instead of buying a single company you get exposure to a basket of assets in one transaction. That basket might consist of the largest companies on the JSE, a selection of global shares, or even thousands of companies across developed and emerging markets. This built‑in diversification is one of the main reasons ETFs are so popular, particularly for investors who are just starting out.
Most ETFs are passive, meaning they track an index rather than trying to outperform it. When the market rises, the ETF rises with it; when markets fall, it falls too. The advantage of this approach is cost. Passive ETFs typically charge far lower fees than traditional actively managed funds, and those savings compound over time. While there is no guarantee of superior returns, decades of evidence show that keeping costs low and staying invested often matters more than chasing standout performance.
In recent years, South African investors have now also got access to actively managed ETFs, or AMETFs. These funds retain the ETF structure but allow a professional asset manager to make active investment decisions. Think of it as your well-known unit trust but now traded on an exchange. While AMETFs can play a role in a portfolio, particularly for investors seeking specific outcomes, most first‑time investors are well served by starting with simple, broad, and low‑cost ETFs.
A common mistake new investors make is overcomplicating decisions. With more than 125 ETFs and AMETFs listed locally, it’s easy to feel paralysed by choice. A more helpful starting point is to think about two things: time and risk appetite. How long do you have to invest, and are you comfortable seeing volatility in your investment value over the shorter term? Most long‑term investors only need one or two well‑chosen ETFs to get started.
If you are risk averse, or unsure how much risk you want to take on, you could consider a balanced AMETF where the asset manager makes the asset allocation decision on your behalf, such as the Prescient Balanced Feeder AMETF. Otherwise, a broad global equity ETF, possibly complemented by a local equity ETF, is often more than sufficient. Success comes not from finding the “perfect” ETF, but from contributing regularly, keeping costs low, and resisting the urge to tinker.
Choosing the right investment is the first part. How you invest matters just as much, which is where the Tax‑Free Savings Account comes in. A TFSA is a great savings vehicle available to South Africans. Any investment growth inside a TFSA is completely free of tax. That means no tax on dividends, no tax on interest, and no capital gains tax, whether you invest for five years or fifty.
There is an annual contribution limit of R46,000 with a lifetime contribution limit of R500,000, and once contributions have been made, they cannot be replaced if withdrawn. Rather than using it for cash or low‑return investments, it generally makes sense to use this tax‑free allowance for growth assets such as equity ETFs, where the benefit of tax‑free compounding can be fully felt.
To see how powerful this can be, consider a very simple example. Imagine an investor who contributes R500 per month into an equity ETF inside a TFSA and earns an average annual return of 10%. Over 20 years, that investor would contribute R120,000 of their own money. Yet the value of the investment after two decades would be close to R382,000. More two thirds of the final amount would come from growth rather than contributions, and because this investment sits in a TFSA, all of that growth would be free from tax.
The final piece of the investment puzzle is the practical question of how to invest. The good news is that there are now several accessible ways to buy ETFs within a TFSA. Most of the major banks offer retail trading platforms with a TFSA option, making it possible to invest directly from an existing banking relationship. Investors can also use platforms such as EasyEquities, and more recently, many of the traditional unit trust LISP platforms have added ETFs to their TFSA offerings. The right choice often comes down to costs, convenience, the range of ETFs available, and how hands‑on you want to be.
Over time, ETFs have fundamentally changed the way people invest by shifting the focus away from trying to beat the market and towards owning the market efficiently. When that approach is paired with the tax advantages of a TFSA, first‑time investors are given a powerful, accessible route to long‑term wealth creation. The real work is done not by clever strategies, but by time, discipline, and the quiet power of compounding.
* Giles is the head of strategy at Prescient Fund Services.
PERSONAL FINANCE