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ETF: No-Frills Portfolio Building
Recently, the MAS (Monetary Authority of Singapore) deregulated six ETFs (Exchange Traded Funds) from the list of SIPs (Specified Investment Products) to EIPs (Excluded Investment Products) which all investors may invest in. Before this deregulation, only two ETFs are included in the EIPs, namely CIMB S&P Ethical Asia Pacific Dividend ETF and CIMB FTSE ASEAN 40. This deregulation added Nikko AM Singapore STI ETF, ABF Singapore Bond Index Fund, iShares Barclays Asia Local Currency Bond Index ETF, iShares Barclays Asia Local Currencies 1-3 Year Bond Index ETF, iShares Barclays USD High Yield Bond Index ETF and iShares Asia Credit Bond Index ETF to the list of EIPs.
ETFs
An ETF is an open-ended fund that is traded on the exchange like any regular stock, therefore giving it liquidity and low sales charges (only regular brokerage fee). Although some funds will appear illiquid (little or no trades), the fund managers have appointed market makers who will buy or sell the fund. The ETF is passively managed by the manager as the objective of an ETF is to track the performance of a certain index (as closely as possible) which will allow low management fees (usually less than 1 percent) as compared to that of unit trust’s (3-5 percent).
The table below will illustrate the difference between ETFs, stocks and Unit Trusts.
Source: DBS Asset Management, ETFs vs Stocks vs Unit Trusts
Why ETF?
ETF is a great way of diversifying your portfolio; incurring as little cost as possible while having a professional to manage them. Insurance companies are one of the biggest holders of ETFs as they invest their funds (including participating funds) for the purpose of efficient asset allocation. If institutional investors are taking advantage of ETF, why shouldn’t retail investors do the same?
By buying into ETF of different benchmarks, investors can easily build their portfolio as it allows them to allocate their asset into different asset classes. Investors can mix-and-match the different ETFs by different weightage to match the objectives of their investments.
Below, we shall introduce the eight ETFs that are inside the list of EIPs for investors.
Source: FactSet, graph of the 8 ETFs
CIMB S&P Ethical Asia Pacific Dividend ETF
(Note: expense ratio at 1.25 percent)
CIMB S&P Ethical Asia Pacific Dividend ETF (lot size: 100 shares) is a fund managed by CIMB Asset Management which tracks the S&P Pan Asia Select Dividend Opportunities Index. The Index is designed to track the performance of ethically conscious, high dividend yielding stocks from the Pan Asia region. To be included in the Index, stocks must have less than 5 percent revenue exposure to alcohol, gaming, pork, and tobacco. The top 40 highest yielding stocks in the Pan Asia region that meet these criteria are represented in the Index.
The fund is suitable for investors with the following objectives:
Aim to achieve investment results that, before expenses, closely correspond to the performance of the Index
To gain investment exposure in equities across Asia Pacific
Want capital growth and income in the form of dividends
Believe that the Index will increase in value
Are comfortable with the greater volatility and risks of an equity fund
CIMB FTSE ASEAN 40 ETF
CIMB FTSE ASEAN 40 ETF (lot size: 100 shares) is a fund managed by CIMB Asset Management which tracks the FTSE ASEAN 40 Index. The Index is maintained by FTSE and represents the 40 largest companies (ranked by market capitalisation) listed on the stock exchanges of Indonesia, Thailand, Malaysia, Singapore and the Philippines.
The fund is suitable for investors with the following objectives:
Want capital growth and regular income in the form of dividends
Believe that the FTSE/ASEAN 40 Index will increase in value
To gain investment exposure in equities across ASEAN
Are comfortable with the greater volatility and risks of an equity fund
Nikko AM Singapore STI ETF
Nikko AM Singapore STI ETF (lot size: 100 shares) is a fund managed by Nikko Asset Management which tracks the FTSE Straits Times Index. The Index is compiled and calculated by FTSE International Limited and represents the top 30 companies listed on the SGX-ST ranked by market capitalisation. The Index Shares are reviewed semi-annually in March and September and are diversified across all sectors.
The fund is suitable for investors with the following objectives:
Seek medium to long-term capital appreciation
Believe that the Index will increase in value
Seek an “index-based” approach to investing in a portfolio of Singapore listed equity securities in a cost effective and easy to access manner
Are comfortable with the greater volatility and risks of an equity fund
ABF Singapore Bond Index Fund
ABF Singapore Bond Index Fund (lot size: 1000 shares) is a fund managed by Nikko Asset Management which tracks the iBoxx ABF Singapore Bond Total Return Index. The iBoxx ABF Singapore Bond Index is an indicator of investment returns of S$ denominated debt obligations
issued or guaranteed by the Singapore government (or any other Asian government), a Singapore government (or any other Asian government) agency, quasi-Singapore government (or any other Asian government) entity, or supranational financial institutions.
The fund is suitable for investors with the following objectives:
Conservative and lower risk long term investors
Those looking to diversify their risk from equities
Those looking for potentially better returns than deposits
Seek exposure in fixed income securities of Singapore (or Asian) government, quasi-government entity, or supranational financial institutions
iShares Barclays Asia Local Currency Bond Index ETF
iShares Barclays Asia Local Currency Bond Index ETF (lot size: 100 shares) is a fund managed by BlackRock which tracks the Barclays Asia Local Currency Diversified Bond Index (BALC). The BALC Index tracks fixed-rate local currency government, government-related, and corporate debt of the following Asian local currency bond markets: South Korea, Malaysia, Singapore, Indonesia, Thailand, Hong Kong, and Philippines. Currency exposures are capped at 25 percent of the overall index market value for diversification.
The fund is suitable for investors with the following objectives:
Prefer income rather than capital growth
Conservative long term investors
Seek an investment that tracks the performance of the Barclays Asia Local Currency Diversified Bond Index
Seek exposure in fixed income securities in Asia
Are comfortable with a passively managed index tracking fund which value will rise and fall in correlation with its underlying index
iShares Barclays Asia Local Currency 1-3 Year Bond Index ETF
iShares Barclays Asia Local Currency 1-3 Year Bond Index ETF (lot size: 100 shares) is a fund managed by BlackRock which tracks the Barclays Asia Local Currency Short Duration Bond Index (BALCSD). The BALCSD Index tracks short-duration (1-3 years) fixed-rate local currency
government, government-related, and corporate debt of the following Asian local currency bond markets: South Korea, Malaysia, Singapore, Indonesia, Thailand, Hong Kong, and Philippines. Currency exposures are capped at 25 percent of the overall index market value for diversification.
The fund is suitable for investors with the following objectives:
Prefer income rather than capital growth
Conservative short or mid term investors
Seek an investment that tracks the performance of the Barclays Asia Local Currency Short Duration Bond Index
Are comfortable with a passively managed index tracking fund which value will rise and fall in correlation with its underlying index
iShares Barclays USD Asia High Yield Bond Index ETF
iShares Barclays USD Asia High Yield Bond Index ETF (lot size: 100 shares) is a fund managed by BlackRock which tracks the Barclays Asia USD High Yield Diversified Credit Index (BAHY). The BAHY Index consists of fixed-rate US dollar-denominated government-related and corporate high yield debt rated at or below Ba1/BB+/BB+ (i.e. below investment grade) using the middle rating of Moody’s, S&P and Fitch of the Asia ex-Japan region. Issuer exposures are capped at 4 percent of the overall index market value for diversification.
The fund is suitable for investors with the following objectives:
Prefer income rather than capital growth
Moderate risk for long term investors
Seek an investment that tracks the performance of the Barclays Asia USD High Yield Diversified Credit Index
Are comfortable with a passively managed index tracking fund which value will rise and fall in correlation with its underlying index
iShares J.P. Morgan USD Asia Credit Bond Index ETF
iShares J.P. Morgan USD Asia Credit Bond Index ETF (lot size:100 shares) is a fund managed by BlackRock which tracks the J.P. Morgan Asia Credit Index – Core (JACI). The JACI Core consists of liquid US dollar denominated debt instruments issued out of Asia ex Japan by Asia-domiciled sovereigns, quasi-sovereigns and corporates and may include bonds rated at or below investment grade.
The fund is suitable for investors with the following objectives:
Prefer income rather than capital growth
Seek an investment that tracks the performance of the J.P. Morgan Asia Credit Index – Core
Low risk for long term investors
Are comfortable with a passively managed index tracking fund which value will rise and fall in correlation with its underlying index
For Passive Investments Only?
ETFs are efficient in building a portfolio, which, over time will appreciate as the index rises. Investors who have little time to manage their investments can buy ETF for passive investments as they require minimal monitoring. These investments will be managed by a professional fund manager.
Source: FactSet, graph of STI 10 years
However, there is also a common misconception by investors that ETFs are only for passive investment. I am sure that as an investor you will face the situation whereby the stocks you buy fell while the index increases. Buying into an ETF can avoid the situation simply because you will be owning a “basket of stocks” instead of one. One can buy into the ETF of a certain index when they expect it to rise and sell when they expect it to fall. These are some of the ways which ETFs can be utilised for active investment.
The bottomline is, ETFs are efficient for portfolio building for different investors. It is up to individual investors to allocate their money into different asset classes to match their investment objectives.
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