Singapore Exchange Limited’s New Launch of Stock Market Indices: How Can Singapore Investors Benefit?

Earlier today, bourse operator Singapore Exchange Limited (SGX: S68) had launched a new set of stock market indices, named the SGX Thematic Indices, under its index business, SGX Index Edge.

For those unaware, SGX Index Edge is itself something new for Singapore Exchange, having been introduced only this October. The underlying idea is for Singapore Exchange to create market indices to meet the growing demand for index-related investment products in Asia.

According to presentation materials given in a Singapore Exchange media briefing for SGX Thematic Indices this morning that my colleague David Kuo and I were invited to, assets that are managed by exchange-traded funds (which track various types of market indices) globally have grown at a compound annual rate of 21% over the past decade.

SGX Thematic Indices sees the Singapore Exchange launching a total of 11 different indices that are categorized under four sectors. The indices are all comprised of stocks listed in Singapore.

SGX stock market indicies

Source: Singapore Exchange’s presentation materials

I noted a few ways that the launch of SGX Thematic Indices could have potential future benefits for investors here in Singapore.

More information

The indices can provide a lot more information for investors to understand their investment choices.

For instance, the SGX S-REIT 20 Index captures the aggregated performance and important financial data (like the dividend yield) of 20 of the largest and most tradable REITs in Singapore; from there, the investor can have a more comprehensive view of how his or her own real estate investment trust investments stack up against the rest.

Possibility of more fuss-free investment choices for investors

The creation of stock market indices helps grease the wheels for the creation of ETFs (exchange-traded funds), which are usually low-cost investment vehicles for investors to access a wide basket of stocks.

Some of the indices in the table – for instance the SGX Real Estate 20 Index and the SGX S-REIT 20 Index – have “very high ETF appeal,” according to the Singapore Exchange. If there are any ETFs that are created out of SGX Thematic Indices in the future, it could mean that investors can gain exposure to a specific sector or even sub-sector of their choice in a fuss-free manner.

But of course, this does not mean that any ETFs which are created from the indices above would naturally make for a good investment. A careful appraisal of (a) the expenses-related with the ETF, and (b) the economic characteristics of the businesses that make up any particular sector or sub-sector, will be key.

Even more investment choices may possibly be in the works

SGX Thematic Indices is really just the first-step in a long game for Singapore Exchange. In the media briefing, Singapore Exchange’s Vice President of Index Services, Simon Karaban, mentioned that the company’s also exploring smart-beta indices.

Most traditional stock market indices weight their components by their market capitalisations. Smart-beta indices on the other hand, tries to weight their components according to different rules in order to achieve stronger returns or meet certain investor-specifications.

For instance, a smart-beta index could be one that’s weighted according to a stock’s volatility, with the least volatile stocks accorded the highest weight so as to cater for investors who would like a fund that tracks an index with lower volatility.

A smart beta index could also be one that weights stocks according to various valuation metrics – such indices could please value investors who are on the hunt for say, stocks with low price-to-earnings ratios or high dividend yields. There are many other ways that a smart-beta index can be created.

The possible appearance of smart-beta indices is something I’m personally excited about. For instance, studies in Singapore have shown how a systematic way of buying stocks with low valuations have earned above-average returns; smart-beta indices that weight stocks based on their valuations could potentially be a way for investors to capture those excess returns.

The proliferation of new indices makes the creation of exchange-traded funds easier, as I had already mentioned, and this can possibly result in more beneficial investment choices for investors.

A Fool’s take

2015 has been a year of positive developments for investors in Singapore.

In January, Singapore Exchange had reduced the board lot size from 1,000 units to 100, making it a lot easier for investors to invest. Today, the company had launched SGX Thematic Indices which can help with investor education and pave the way for the appearance of more useful, low-cost investment products.

SGX Thematic Indices is by no means guaranteed to be a success, but let’s hope – for our sake as individual investors – that it can gain widespread acceptance in the investing community.

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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 writer Chong Ser Jing does not own shares in any companies mentioned.