The first 10 months of the year was surreal for Vetiva Capital and NewGold Managers, who are the fund sponsor and fund managers of the NewGold ETF after they saw the market capitalization of their Gold focused ETF jump about 4,484 percent between the start of January and month end October 2020.
The small cap fund of just N769.5 million at the start of last year rose to a record N35.2 billion on October 30, 2020 driven by investors seeking to earn positive real returns and bewildered by extreme exchange rate volatility and dollar scarcity through an innovative ETF that offered local investors gold exposure.
An exchange traded fund (ETF) is a basket of securities that trade on an exchange, just like a stock. ETF share prices fluctuate all day as the ETF is bought and sold; this is different from mutual funds that only trade once a day after the market closes. ETFs can contain all types of investments including stocks, commodities, or bonds; some offer U.S. only holdings, while others are international.
In this case for NewGold, the underlying asset in their ETF is gold. Each NewGold security is equivalent to approximately 1/100 ounces of real gold bullion held in a secured stockpile of gold bullion. All gold is kept in the form of London Gold Delivery Bars and Good Delivery Standards are prescribed by LBMA.
The NewGold ETF was launched on the Johannesburg Stock Exchange (JSE) in November 2004 and was listed on The Nigerian Stock Exchange (NSE) in December 2011. NewGold tracks the price of gold and offers institutional and retail investors the opportunity to invest in a listed instrument (structured as a debenture) that is fully backed by gold bullion.
Whilst the NewGold ETF served as a wonderful hedge against Naira for most of 2020, it now looks to have lost its appeal to investors after the second official Naira devaluation in August 2020. Since peaking at N35.2 billion on October 30, 2020, the market capitalization of NewGold ETF has tumbled about 73 percent as at end of month trading in January when the ETF closed at a market cap of around N9.5 billion.
With bonny light oil price now trading at $54 per barrel, analysts are saying that the risk of another significant naira devaluation is fading away quickly due to higher foreign exchange earnings for Nigeria which can be used to stabilize Naira in the foreign exchange market.
The ETF market in Nigeria still hasn’t reached mass appeal as the combined market capitalization of all 10 listed ETFs on the Nigerian Stock Exchange was only N16.2 billion as at January 22 according to data obtained from Nigeria’s Securities and Exchange Commission. However, exciting stories like that of NewGold ETF have certainly contributed to increasing the popularity of the relatively new asset class on the local bourse.