Saturday, December 25, 2010

Investing in Singapore listed ETFs

ETFs is the acronym for exchange traded funds, which are basket of stocks traded over the exchange. Having invested nearly 0.5M in stocks I must agree that ETFs are not exciting products for people looking at supernormal returns. However, holding ETFs means sleeping better at night since I will probably not be losing my entire capital even during market crash.

Take the STI ETF for example. If I lose my entire capital invested, this would literally translate to DBS, UOB, OCBC, SIA, Singtel trading at zero dollars. For that to happen, I think putting money anywhere will mean total loss anyway.



Besides, STI ETF pays regular dividends as well. Historically, the dividends are about 4-6 cents per unit, which translates to miserable yield of 2%. Well, don’t expect Singpost or SPH dividends payout if you are buying STI ETFs. People mainly buy it for capital appreciation.



The sales charge is equal to brokerage charges (0.2%), management fee of about 1% and that’s it. No need to rebalance portfolio as fund manager does that for you, daily.



I have been through the Lehman crisis and it’s terrible to see my stock holdings bleed day after day. Fortunately, I was holding on to pure blue chips and that gave me conviction to hold. Dividends came in timely as I repurchase other even badly battered mid cap stocks that gave me more than 100% returns on hindsight.



Today as I looked back, I might not have fare much better if I invested in STI ETF. However, I definitely would have slept better during the crash in 2008. This is what portfolio theory explains: Invest according to risk tolerance and you will get an optimal portfolio that gives you the highest return based on your risk profile.



I want to blog more about ETFs as this is the next direction I am getting into. No more single large stock purchase, mainly diversified portfolio in different regions.



In Singapore, we can access to the worlds markets just by buying ETFs and paying the minimum brokerage of 0.2%. However for a start, I would like to constrain myself to buy plain vanilla ETFs instead of exotic new generation ETFs.



From SGX website:

Plain vanilla ETFs (as I termed it) are cash based ETFs that adopt either full replication methodology or representing sampling methodology

Full replication methodology
The ETF holds the same stocks in the same proportion as the weights of the constituent stocks in the benchmark index.


Representative sample methodology
The ETF holds a selected number of constituents stocks of the underlying index according to their degree of historical correlation with such index. In other words, the ETF holds a sample of constituent securities that statistically represents the index.

In other words, my invested captial is backed by shares of companies as underlying assets.

List of cash based ETFs

Cash-based ETFs

SGX Stock Code

ABF Singapore Bond Index ETF

A35

CIMB FTSE ASEAN40 ETF

M62

Daiwa FTSE Shariah Japan 100 ETF

F1F

DBS Singapore STI ETF

G3B

iShares Dow Jones US Technology Sector Index ETF

I21

iShares MSCI Singapore Index ETF

I19

iShares S&P 500 Index ETF

I17

SPDR Dow Jones Industrial Average ETF

D07

SPDR® Gold Shares

O87

SPDRs® S&P 500® ETF

S27

streetTRACKS® Straits Times Index ETF

ES3

As I am only interested in investing in cash based ETFs, options to me are still quite limited. I have invested in STI ETF and will probably look into gold etf (O87, S27), American markets (I17, I21), ASEAN markets (M62).

Asean 40 ETFs invests mainly in Singapore stocks (40%) and the rest in Malaysia (31%), Indonesia (17%) and Thailand (11%). Quite an interesting combination.

As for exotic ETFs which I termed that myself because I don’t quite like the fact that I am not holding on to actual securities but rather options/notes of the underlying assets. If you want more info on this, check this link out: http://www.sgx.com/wps/portal/marketplace/mp-en/products/securities_products/etfs

Though counterparty risk may be low, but I still traditionally believe that investment should be simple and direct. I don’t mean to put new generation ETFs down, but it is just a personal preference to keep my investments simple. Even though that means I am losing out on buying Brazil, Russia, China index funds. Well, I may invest in an emerging market unit trust instead to ride the new commodities and BRIC wave.

9 comments:

I said...

Hi,
actually the cash based ETF's have much higher liquidity on the NYSE than on SGX. so maybe buying etf's in the us market would be better.

Sgbluechip said...

Liquidity not a problem on sgx as there is always market maker to provide quotes. Anyway if buying for long term, liquidity shouldn't not be an issue as well. Trading on NYSE means to transact in US$, incur exchange rate cost and I am personally very bearish on US$. Moreover, this also does not fulfill my simple, direct concept of investment.

Collin said...

Would be interesting if you make a comparison between ETF and Index Fund?

Unknown said...

Hi,

can you explain your rationale to rather invest in an emerging market unit trust rather than an emerging market ETF ? I thought ETFs have less expenses and thus higher returns?

Thank you

Singapore Man of Leisure said...

Hello SBC,

Yes, do blog more on ETFs in future. I've followed your blog for 1 year now, and have enjoyed it very much.

I am hesitant to buy ETFs on the SGX as the liquidity is very low - thus the bigger spread between bif and offer.

It will be good if we can learn from our actual experience in buying and selling ETFs on SGX.

Keep the blog posting coming!

Sgbluechip said...

Refer to sgx link.

Sgbluechip said...

If you are concern with just 0.5% to 1% spread and miss out on annual returns of 8%-12%, I think it's good to start looking beyond that. No offence, but there are always pros and cons. Isn't buying UT in the first place incurring a spread?

No free lunch.

Harry said...

Hello Sir, is there any easy way to identify the cash based ETFs from the swap based ones, looks like the SGX site has placed them all in the same section. Thanks in advance

D said...

Hi, I am switching my invetsment strategy as I am reaching retirement and chance upon your post on ETF. What ETFs have you bought into so far and what is your comment and expereiences? Which STI ETF has the lowest cost? Can I buy like a normal stock or what. Thank You