An exchange traded fund (ETF) is a fund traded on a stock exchange, which seeks to copy a specific market index such as Singapore’s Straits Times Index. And there are ETFs for different asset classes – the most popular being stocks, bonds and commodities.
Because an ETF essentially seeks to copy a particular index, investor returns should be close to that for the chosen market index it follows. But it does not necessarily mean an ETF’s returns will be exactly the same as that of the underlying index. There is something called “tracking error”. To closely replicate the performances of underlying indices, these ETFs have to constantly adjust the number of shares held in specific stocks as stock prices fluctuate. Time lags between market price movements and the adjustments in the ETF’s stock holdings can cause differences between the ETF’s performance vis-à-vis the benchmark index’s performance.
Why do people invest in ETFs?
ETFs are useful investment instruments for new investors who want stock diversification from relatively small outlays. This is because buying into one ETF gives investors access to the performance of a larger portfolio of stocks or bonds. This reduces single stock/single bond concentration risk.
Also, they have lower costs. Management fees are lower because they are passively managed and do not employ fund managers for stock selection. They just buy the stocks to replicate the underlying index.
ETFs suit investors who are not trying to get better returns than the underlying index – that is, people who are happy with matching the index in returns performance.
Where do you start?
You can invest in ETFs through either trading platforms (you’ll need a trading account) or regular savings plans (RSPs). For investments via trading platforms, you can invest in lump sums, whenever you wish. For RSPs such as POSB Invest-Saver, under which a fixed amount is invested every month via GIRO, you can start with as little as S$100 a month.
Advantages of a regular monthly investment in ETFs
For starters, you don’t need substantial capital to start investing.
And it removes the difficult decision-making involved in market timing. Often novice investors delay getting started because they agonise over the timing of their investments. A RSP imposes a commitment to invest a certain amount every month. It works on the idea of averaging out the prices paid over time and relying on the idea that good stocks and bonds generally build value over time.
What ETFs can i buy in singapore?
There is a range of ETFs traded on the Singapore Stock Exchange (SGX) offering investment access to diverse markets, from stocks to bonds to commodities. The range of geographies covered is very extensive, including Singapore, China, Japan, Europe and the United States.
Under the POSB Invest-Saver RSP, two SGX-traded ETFs offered at the time of writing this article are the Nikko AM Singapore STI and the ABF Singapore Bond Index Fund.
The Nikko AM STI ETF invests in companies that make up the Straits Times Index. The STI is an index of Singapore’s top 30 companies, including well-known blue-chip stocks such as the three local banks, Singtel, Keppel Corporation and CapitaLand.
Investors in the ABF Singapore Bond Index ETF are putting money into a range of bonds, mostly issued by the Singapore Government and quasi-Government bodies.
Another ETF offering investment in Singapore stocks is the SPDR Straits Times Index ETF.
Investing beyond singapore via ETFs
If you want to go beyond investing in Singapore, you can also invest in global markets through a range of other ETFs traded on the SGX.
As indicated above, the range is extensive, including (but not limited to) ASEAN, Japan, China, Europe, and US stock index ETFs. One popular example is an ETF which tracks the S&P 500 Index – the SPDR S&P 500. The S&P 500 is an American stock market index of the top 500 companies listed on the New York Stock Exchange or NASDAQ. The companies here include names such as Apple, Microsoft, Amazon, Facebook and Warren Buffett-led Berkshire Hathaway.
There are also commodities and gold ETFs.
And it all starts with as little as a few hundred dollars
As we have outlined above, you can start with S$100 a month under a RSP.
Your CPFIS funds can be used for four of the SGX-traded ETFs (SPDR Gold Shares, SPDR Straits Times Index ETF, Nikko AM Singapore STI ETF and ABF Singapore Bond Index Fund). And the Supplementary Retirement Scheme can be used to invest in all SGX-traded ETFs.
If buying directly on the SGX (rather than through a RSP), you can work out quickly how much you need to start by asking your bank or stockbroker the minimum “board lot” size. These ETFs most commonly trade in board lots of 10 and 100.
For example, the ABS Singapore Bond ETF trades in board lots of 100. At its price at time of writing of S$1.12, you need S$112 to begin. The Nikko AM STI ETF also trades in board lots of 100 units. And at its price of S$3.31 at time of writing, you need S$331 to begin.
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Exchange Traded Funds (ETFs) have grown in popularity over recent years. What are their features and benefits? The most distinctive feature is they do not try to beat the market – they do not attempt to outperform their chosen market index. They only seek to track the chosen market index so investors get a return that is close to what the index makes. Bear in mind, there may be small variations against the index’s actual returns – something called “tracking error”.
So, for example, if the ETF invests in Singapore stocks, then their chosen market index is the Straits Times Index (STI). The Singapore market ETF does not try to do better than the STI – they are structured to closely (not perfectly) track the index.
1. Lower management fees than those typical for unit trusts:
ETFs bear significantly lower annual management fees because of this distinctive feature of not attempting to beat the market but to simply follow the market. So, they do not need to hire fund managers to “actively manage” the holdings. All they do is structure their stock holdings to closely mirror the performance of the underlying index. This is called “passive investment” and costs less than “active management.” Management fees will differ in different ETFs. But generally, they are significantly lower than for unit trusts. As an example, the Nikko Asset Management Singapore STI (Straits Times Index) ETF had an annual management fee of 0.2% last year. This was much lower than management fees charged by unit trusts, which are typically around 1% and sometimes more. But to be fair, this means investors are giving up the possibility of putting their money with a unit trust fund manager who may outperform the fund’s benchmark index. So, ETFs make sense where unit trusts available in your chosen market are not outperforming the benchmark index sufficiently to justify their higher fees.
2. Unlike unit trusts, there are neither initial sales charges (subscription fees) nor redemption (realisation) fees for etfs.
Unlike the situation with unit trusts, investors who buy ETFs on the SGX don’t pay initial sales charges. Nor do they pay redemption fees for selling their ETF units. An alternative to buying through a broker is investing via a regular savings plan. But for smaller amounts such as S$100, the sales charge is likely to be much cheaper than buying through a brokerage because it is common for brokerages to charge a minimum fee (often around S$25) for trades.
3. Small initial investment.
ETFs can typically be bought and sold on the Singapore Exchange (SGX) for board lots of 100 units. That translates into smaller initial investments than for unit trusts. For example, the ABF Singapore Bond ETF was trading at $1.117 at the time of writing – which translates to investments from as little as $112. Another example is the Nikko Asset Management Singapore STI ETF, which traded at $3.44, translating to investments as little as $344. Unit trust investments typically start at $1,000 although they can be much lower under a regular savings plan. However, the minimum brokerage fees mentioned above in #2 can be quite substantial in percentage terms for small amounts. So, in this instance, again, where investing in small amounts, it might be more cost efficient to buy ETFs through a regular savings plan.
4. Diversification for a small outlay.
For example, the SPDR Straits Times Index ETF holds 30 stocks to replicate the Singapore market index. That’s available at board lots of 100 units. And at a price of $3.39, that’s giving investors access to a small slice of a 30-stock portfolio for only $339.
5. Reducing single stock risks.
So, it follows that if a retail investor was to start with only a few thousand dollars, the chances are he will only be able to start with one stock. That exposes the investor to “single stock concentration risk” – meaning he has put all his available investment dollars in one stock. And if something averse happens to that stock, the investor’s entire portfolio is affected. By investing in an ETF with 20-30 stocks, the impact of poor performance in any single stock is diluted.
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