As Foolish investors may know, the Straits Times Index (SGX: ^STI), the most prominent stock market benchmark in Singapore, is made up of 30 different stocks.
What may not be that well-known is that the list of 30 is reviewed on a quarterly basis to determine whether any changes should be made. In a recent review, Noble Group Limited (SGX: N21) was dropped from the index and replaced with CapitaLand Commercial Trust (SGX: C61U), a stock from the Straits Times Index’s reserve list. The switch was announced early last month and actually happened on 21 March.
The reserve list consists of five stocks which may one day join the index. A recent report from bourse operator Singapore Exchange Limited (SGX: S68) had shed some light on them. In going through the report, I found six important things investors should know about the reserve list stocks and the possible future of the Straits Times Index (data as of 24 March 2016 unless otherwise stated):
- The five reserve list stocks have logged in an average total return of 36.1% over the past five years. Standout performers include Singapore Post Limited (SGX: S08), First Resources Ltd (SGX: EB5), and Suntec Real Estate Investment Trust (SGX: T82U). They have total returns of 81.1%, 70.9%, and 51.9%, respectively. Neptune Orient Lines Ltd (SGX: N03) was the worst with a 35.3% loss.
- Dividend lovers might be excited to know that the average dividend yield of the quintet is 4.6%. In contrast, the SPDR STI ETF (SGX: ES3), an exchange traded fund which mimics the fundamentals of the Straits Times Index, had offered a dividend yield of ‘only’ 3.5% at the end of March 2016. It might not be surprising to learn that the top dividend contributors are the real estate investment trusts in the reserve list. There are two, namely, Suntec REIT and Keppel REIT (SGX: K17) and they weighted in with yields of 5.8% and 6.6%, respectively.
- Singapore Post and First Resources might add diversity to the Straits Times Index. The former is considered to be in the industrials sector while the latter is in the consumer staples sector. Both sectors have small weights in the index, according to a recent report by the SPDR STI ETF.
- The average price to earnings (PE) ratio for the reserve list quintet sat at 15.8. In contrast, the SPDR STI ETF had a trailing PE ratio of 11.7 at the end of March. Singapore Post and First Resources both sported PE ratios of above 20. The inclusion of either stock could thus push up the PE ratio of the Straits Times Index.
- The reserve list stocks also had an average price-to-book (PB) ratio, another valuation measure, of 1.6. In contrast, the SPDR STI ETF had a PB ratio of under 1.2 at end-March 2016. And again, it was Singapore Post and First Resources with the high valuations – they had PB ratios of 3.2 and 2.3, respectively.
- Finally, dividend investors might not fancy having First Resources and Neptune Orient Lines as part of the Straits Times Index. The SPDR STI ETF had yielded 3.5% at the end of March as mentioned earlier. First Resources, on the other hand, only offered a dividend yield of 1.9% while Neptune Orient Lines did not have a yield number.
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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 Chin Hui Leong owns shares in Suntec REIT.