Know nothing about ETFs? Read this.

A stock market index measures the value of a portfolio of stocks. Take the example of the Dow index, which is one of the world’s most recognised indices. It represents 30 of the largest US companies. Corporate giants like Apple Inc., Goldman Sachs, IBM, and Microsoft are represented in the Dow index.

Although each of these companies has great potential, their stock prices are subject to volatility. An investor who buys the stock of one of these companies could be exposed to a high degree of risk.

What if there was a way to invest in all the stocks that comprise an index with a limited amount of funds? This is where an exchange traded fund (ETF) comes in.

 

What is an ETF?

An ETF is run by an asset management company that pools the resources of investors and buys stocks in all the companies represented in an index. How much of each stock does it buy? This is decided by the weight that a company has on a particular index.

For example, an ETF that tracks the Singapore Straits Times Index would hold a greater value of shares in the DBS Group than in Singapore Airlines since the former has a greater weight in the index.

ETFs offer investor several advantages:

• If you buy into an ETF, you do not need to conduct any research into the prospects of various companies. The index that your ETF tracks will take care of that. Singapore’s Straits Times Index is reviewed on a quarterly basis. Only large and stable companies remain in the index.

• An ETF trades like a stock. You can buy and sell it on the stock exchange just like a share in any company. This allows you to determine the value of your investment on a real-time basis and also provides you with a high degree of liquidity.

• The fees and charges that you pay to the asset management company that manages the ETF are very low. This is because there is no need to conduct research into the operations of various companies to determine which has the greatest potential for appreciation. The ETF mirrors the index. Shares in companies are bought and sold with the objective of tracking the index as closely as possible.

   

   

   

  The Nikko AM Singapore STI ETF has an expense ratio of just 0.35%. This compares very favourably with the expense ratio of unit trusts, which can be much higher.

• You don’t need a great deal of money to invest in an ETF. The two ETFs in Singapore that track the Singapore Straits Times Index have a minimum lot size of 100 shares.

Here are some details about the two ETFs that track the Singapore Straits Times Index.

SPDR Straits Times Index ETF

This ETF is managed by State Street Global Advisors, a firm that launched its first ETF 24 years ago. What does the name SPDR signify? It stands for Standard & Poor’s Depositary Receipts, which was the first ETF launched by the company back in 1993.

The SPDR Straits Times Index ETF is of more recent vintage. It was started 15 years ago in April 2002. How well has the fund performed? The recent surge in the Singapore stock market has ensured that the returns in the last one year have been excellent. Over a longer time frame, the appreciation in the value of the investment made in this fund has been more subdued.

Source: State Street Global Advisors

The returns mentioned above include the dividends that the fund pays. This is the money it collects as a dividend from all the companies that it has invested in. These amounts are also used to pay for the ETF’s expenses. You can expect a dividend yield of about 3% every year.

 

Nikko AM Singapore STI ETF

The Nikko AM Singapore STI ETF was launched in 2009, several years after the SPDR Straits Times Index ETF. But Nikko Asset Management, the company that manages the fund, has been active in Singapore since 1990 when it opened its office here to cater to the corporate pension fund market.

As its name implies, this ETF also tracks the Straits Times Index. It manages S$162 million for investors.

Individuals can invest by buying units in one of four ways:

• Cash investments

• By deploying their Central Provident Fund balances. This ETF is included under the Central Provident Fund Investment Scheme.

• Transferring amounts in the Supplementary Retirement Scheme (SRS) – this is a voluntary scheme that complements the CPF. By transferring funds into the SRS, you can build up the sum available for your post-working years.

• Regular savings plan (RSP) – an ideal way to set aside sums as low as S$100 every month. It is possible to accumulate a sizeable amount over a period of several years.

 

Here is how this ETF has performed:

Source: Nikko Asset Management Fact Sheet as on 28 February 2017

 

Benefit from a rise in the index

By buying an ETF, you gain the advantage of making a profit when the stock market rises. It is a passive form of investing requiring little effort on your part. Of course, if the index falls or remains stagnant, your returns would suffer. But over the long term, you have a fair chance of making significantly high returns.

 

(By Ravinder Kapur)

Related Articles
- How do Mutual Funds and ETFs differ?
- The basics of a hedge fund
- Investing in industry specific funds