STI ETF A Possible Springboard For Starter Investors

Foreword from ShareInvestor

This article “STI ETF A Possible Springboard For Starter Investors” by Stephanie Luo was first published in The Business Times on 01 Jun 2017 and is reproduced in this blog in its entirety.

Passive investors, in their search for equity investment ideas, are often led to this instrument known as the exchange traded fund (ETF), an open-ended investment fund that aims to replicate the performance of a published market index.

Singapore Exchange (SGX) defines an ETF this way: It is listed and traded on a stock exchange, and investors may buy or sell ETF units to participate in the performance of the underlying index which tracks equities, fixed income, commodities or money market instruments.

On SGX, some 80 ETFs are listed, quite a maze to go through for the starter investor.

For the passive investor who has decided to give ETFs a shot, a possible good starting point is the SPDR STI ETF.

SPDR is a trademark standing for Standard & Poor’s Depository Receipts but often conveniently read as Spider. STI ETF stands for Straits Times Index Exchange Traded Fund.

The name STI ETF indicates that this ETF is aimed at mirroring the performance of the underlying STI, the benchmark barometer of the Singapore stock market. The STI comprises 30 components representing the top stocks on SGX by market capitalisation.

So why STI ETF for a start?

First, it offers risk diversification – in business sector and geographic terms. Among the STI’s current components are Singapore’s three banking groups, property heavyweights and Jardine companies. There are also three real estate investment trusts (Reits).

The breakdown of STI’s constituents shows that 34 per cent are banks, 18 per cent are real estate and 14 per cent are capital goods. Also included are consumer staples, telecommunication services and transportation. Unless there is a systemic risk affecting all the sectors at the same time, the advantage of industry diversification is a protection against the cyclical nature of some sectors, such as oil & marine.

In terms of free-float weighted revenue reach, the bulk comes from Singapore (46 per cent) and the Asia Pacific ex-Singapore (47 per cent).

Secondly, the STI ETF makes it affordable for one to buy into 30 companies representing a broad cross section of business sectors. To buy the 30 stocks individually will mean a big investment outlay.

In “Heritage & Highlights of the Straits Times Index” published on May 15 on SGX’s website, it said that the STI ETF yielded a dividend-inclusive return of 190 per cent in Singapore dollar terms over the 15 years since its listing in 2002. The figure was just five percentage points less than that of the STI, which generated a 195 per cent total return (also in Singapore dollar terms) over the same period.

The SPDR STI ETF beat Japan’s Nikkei 225 Index and Hong Kong’s Hang Seng Index, which yielded a 15-year dividend-inclusive return of 87 per cent and 176 per cent respectively.

Past performances are not necessarily indication of future performances. So it must be noted that the STI ETF, like individual stocks, is subject to the vagaries of market forces. There will inevitably be ups and downs along the way.

For further protection, the starter passive investor can employ dollar-cost averaging, an investment technique involving buying a fixed dollar amount of a particular investment on a regular schedule, regardless of the share price. The investor purchases more units when prices are low and fewer units when prices are high, resulting in a lower average cost over time. This means the investor is diversified across time as well.

To quote an example from the SGX, applying month-end STI ETF prices, and a fixed investment of S$1,000 every month, the investor would have purchased 373 units of the STI ETF in January 2016 when the units were priced at S$2.68.

Conversely, when the STI ETF units were priced at S$3.57 in April 2015, the investor would have purchased 280 units. Since January 2016 is near market lows, this means that the investor purchased one-third more units. The example is for education purposes only and does not include transaction costs, said SGX.

Some banks and stockbrokers in Singapore have regular shares savings plans starting from S$100 a month. There is also another STI-based ETF known as the Nikko AM Singapore STI ETF, which was listed on SGX in 2009.

Legendary investor Warren Buffett once said: “By periodically investing in an index fund . . . the know-nothing investor can actually outperform most investment professionals.”

No one knows for sure how it will pan out in the case of STI ETFs. Although there are reasonable yields from dividends in the short term, the STI ETF is an instrument for potential long term gains, which may suit passive investors with little time to do their investment homework.