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3 Things You Never Knew About the Straits Times Index

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Ever wondered what it really means for an investor to invest into the Straits Times Index (SGX: ^STI) through index trackers like the SPDR STI ETF (SGX: ES3) or Nikko AM STI ETF 100 (SGX: G3B)? Both trackers are exchange-traded funds designed to track the movements of the STI by holding shares of the index’s 30 constituents in roughly the same weighting that it does.

Here are three things you need to know about the index before investing in it.

1. How it’s weighted

The STI is a market capitalisation-weighted stock market index of 30 shares listed in Singapore. This means that a company such as Singapore Telecommunications Limited (SGX: Z74), with its market cap of S$62.8 billion, will have a much larger weighting in the index as compared to a company such as SIA Engineering Company Limited (SGX: S59), which has a market value of ‘just’ S$5.1 billion. Incidentally, SingTel and SIA Engineering also happen to have the largest and smallest market caps, respectively, within the STI.

In any case, given SingTel’s larger weighting in the index, its eventual price movements would have a lot more influence on the STI’s ups and downs as compared to say SIA Engineering – investors in the index are thus more susceptible to the ebb and flow of the telecommunications industry (SingTel’s line of work) as opposed to say aircraft maintenance (SIA Engineering’s bread and butter).

2. The power of the Jardine Group

One group of companies stands out in the index – the Hong Kong-based Jardine Group. The reason for their prominence is that the group actually has 4 related companies within the index, namely Jardine Matheson Holdings Limited (SGX: J36), Jardine Strategic Holdings Limited (SGX: J37), Jardine Cycle & Carriage Limited (SGX: C07), and Hongkong Land Holdings Limited (SGX: H78). And, they are not small companies either – the quartet have a collective market cap of S$137 billion as of 1 August 2014, which is 25% of the total market cap of the STI’s 30 constituents.

Investors in the STI should take note of the large skew of their investments toward the Jardine Group of companies.

3. The STI is more than a proxy to Singapore’s economy

Although the STI is the main market index for Singapore’s share market, it is far from being just a proxy for Singapore’s economy alone. This is because almost all the 30 companies in the index have an international presence with some even actually having negligible business activities in Singapore. Starhub Ltd. (SGX:CC3) might be one of the few that derives all its earnings from our shores.

Foolish Summary

If you’re an investor who is interested in investing in share market indexes, you may want to find out more about how each index is constructed. If not, you might find yourself overly exposed to risks you did not even know were there, such as having concentrated holdings in a small group of companies.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Stanley Lim doesn't own any shares of companies mention above