Exchange-traded funds (ETFs) are securities which track a basket of shares and trades just like a share themselves on a stock exchange. The main objective of an ETF is to produce the same returns as the specific index which it mimics. Since ETFs are managed passively without a manager picking what goes into or out of the portfolio, they charge much lower fees than unit trusts which are managed actively. One big benefit for individual investors when it comes to ETFs is that they allow instant diversification. With just one ETF, one may control shares from a few hundred companies,…
Exchange-traded funds (ETFs) are securities which track a basket of shares and trades just like a share themselves on a stock exchange.
The main objective of an ETF is to produce the same returns as the specific index which it mimics. Since ETFs are managed passively without a manager picking what goes into or out of the portfolio, they charge much lower fees than unit trusts which are managed actively.
One big benefit for individual investors when it comes to ETFs is that they allow instant diversification. With just one ETF, one may control shares from a few hundred companies, like with the SPDR S&P 500 ETF Trust.
Fondly known as “SPY” amongst investors, the SPDR S&P 500 ETF, which tracks the S&P 500 index in the USA, is the most popular ETF in the world. The S&P 500 consists of 500 large companies in the US stock exchanges. The top three holdings of the index are currently Apple Inc., Exxon Mobil Corporation and Microsoft Corporation.
Some risks involved with ETFs include the tracking error, which is a measurement of how much the return of an ETF deviates from the actual return of its benchmark index. This error is almost always present (though the amount can differ widely between different ETFs) as the fund cannot replicate an index fully in a fool-proof manner.
In Singapore’s stock exchanges, there are more than 90 ETFs listed. But, only five of them have a focus on Singapore. Let’s take a look at three of these Singapore centric ETFs now.
1. SPDR STI ETF (SGX: ES3)
The SPDR STI ETF is an ETF that tracks the Straits Times Index (SGX: ^STI). The STI is of course Singapore’s share market barometer and it’s made up 30 Singapore-listed shares with large market capitalisations.
DBS Group Holdings Ltd (SGX: D05), Oversea-Chinese Banking Corp. Limited (SGX: O39) and Singapore Telecommunications Limited (SGX: Z74) are currently the top three constituents of the STI and consequently, also the three holdings in the SPDR STI ETF.
In terms of the ETF’s composition, banks take up 30.7%, industrial goods & services providers account for 16%, while real estate companies cover 15.1%.
The ETF is managed by State Street Global Advisors Singapore Limited. The total expense ratio (a.k.a the total fees that the ETF charges) of the fund is 0.30% per annum.
Over the five years ended 31 July 2014, the ETF has returned 7.21% per annum, including gains from reinvested dividends. This means that S$10,000 invested five years ago would have turned into S$14,164 by the end of July this year. Since its inception in April 2002, however, the fund’s annualised returns have been higher at 8.65% per annum.
The ETF currently trades in a board lot size of 1,000 units. At its current price of S$3.36 per unit, investors need to put up at least S$3,360 per lot. However, this is set to change from 19 January 2015 onward as the board lot size for the ETF will be reduced to 100 units. More details of the ETF can be found here.
2. Nikko AM STI ETF (SGX: G3B)
Similar to the SPDR STI ETF, the Nikko AM STI ETF also tracks the STI. However, this ETF is managed by Nikko Asset Management Asia Limited, unlike the SPDR STI ETF.
Allocation wise, banks form 30.6% of the ETF, holding companies (or industrial goods & services) take up 17.2%, and real estate outfits cover 11.7%.
The Nikko AM STI ETF has a higher total expense ratio of 0.39% per annum.
Given that the fund only started in 2009, the Nikko AM STI ETF has a much shorter history when compared to the SPDR STI ETF. For the five year period ended 31 July 2014, the annualised return for the Nikko AM STI ETF is 7.27% – the same S$10,000 invested five years ago would have turned into $14,203.
The good thing about this ETF is that it’s already trading at a board lot size of 100 units. At its current price of S$3.42, investors need to fork out only S$342 per lot.
For more details on the ETF, you can click here.
3. ABF SG Bond ETF (SGX: A35)
The ABF SG Bond Fund ETF is the first bond ETF in Singapore. It is managed by Nikko Asset Management Asia Limited as well. The ETF invests in a basket of high-quality bonds issued by the Singapore Government and Government-linked bodies such as the Housing & Development Board, Land Transport Authority, and PSA Corporation Limited.
The total expense ratio is 0.26% per year and the actual holdings in its portfolio can be seen here.
Since it started in 2005, the ETF has returned 2.72% per annum. Bonds are deemed as less risky financial instruments when compared with shares and can be used as part of an investor’s asset allocation plan.
Just like the SPDR STI ETF, this bond ETF trades in a lot size of 1,000 units currently. But come 19 January 2015, you can also buy this ETF at 100 units per lot. It is trading at S$1.17 per unit at the time of writing.
More details on the bond ETF can be found here.
The information given above for the ETFs is useful for all types of investors interested in the share market as it’s just good to know about the different types of options in Singapore’s share market apart from just individual shares. For those wanting to know more about investing in Singapore, click here now for our special FREE report titled What Every Singapore Investor Needs To Know.
The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Sudhan P doesn’t own shares in any companies mentioned.