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Straits Times Index ETFs: Which Is Better?

Since the start of the year, the Singapore stock market benchmark, the Straits Times Index (SGX: ^STI) has risen some 20%.

A 20% increase in less than 12 months is commendable by any measure. However, we are not able to buy the index outright. What investors could have done, instead, was to buy one of the two exchange-traded funds (ETFs) that mimic the Straits Times Index.

Partake in Singapore’s stock market

The two ETFs – the SPDR STI ETF (SGX: ES3) and the Nikko AM STI ETF (SGX: G3B) – have an investment objective to replicate the performance of the Straits Times Index as closely as possible, before expenses are factored in.

This also means that whenever there are changes to the components of the benchmark index, the holdings of the ETFs will be refreshed as well. For example, in September this year, when Jardine Strategic Holdings Limited (SGX: J37) replaced SIA Engineering Company Ltd (SGX: S59), the two ETFs had to do the necessary changes.

Now, some of you may be wondering: What’s the difference between the SPDR STI ETF and the Nikko AM STI ETF? Turns out, there are two major differences between the two ETFs that investors should note before investing in any of them: The expense ratio and tracking error.

Source: Respective prospectuses and annual reports of ETFs (all data as of 31 October 2017, except Nikko AM STI ETF’s expense ratio, which is as of 30 June 2017)

Even though both ETFs have much lower expense ratios compared to unit trusts, the ETF run by Nikko Asset Management has a higher expense ratio than State Street’s offering.

What the difference in expense ratio means is that for an investment of $10,000, the expense charged over a year for the SPDR STI ETF would be S$30, while that for the Nikko AM STI ETF will be $33. This difference may not seem significant, but over the course of many years, higher expenses can really eat into an investor’s returns.

Often, the advice given to investors is to simply buy an ETF with the lowest fees, but this may not always be advantageous if the fund does not track its index as well as it is supposed to.

An ETF’s tracking error tells us how much an ETF’s performance deviates from its underlying index’s actual performance. If the tracking error is wide, it means that an investor would not be getting the full gains delivered by an index. A high tracking error would eat into an investor’s returns as well.

From the table above, the SPDR STI ETF’s tracking error is much lower than the Nikko AM STI ETF’s, and this means that the former is doing a better job at tracking the Straits Times Index than the latter.

The Foolish takeaway

Warren Buffett once said:

“A low-cost fund is the most sensible equity investment for the great majority of investors. My mentor, Ben Graham, took this position many years ago, and everything I have seen since convinces me of its truth.”

Investors looking to make passive investments could consider buying an index ETF. However, as seen in the examples above, not all ETFs are created equal. Hopefully, this article will be helpful for you to make an informed decision on which Straits Times Index ETF to buy.

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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 Sudhan P owns units in SPDR STI ETF.