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Singapore’s STI ETFs: Which Is Better?

Billionaire investor, Warren Buffett, is a huge proponent of buying low-cost index funds. He once said during an interview with CNBC:

“Consistently buy an S&P 500 low-cost index fund. I think it’s the thing that makes the most sense practically all of the time. The trick is not to pick the right company. The trick is to essentially buy all the big companies through the S&P 500 and to do it consistently.”

Like Buffett said, investing in a basket of stocks instead of picking individual companies might be the better option, especially for new investors. The basket of stocks, also referred to as an exchange-traded fund (ETF), offers instant diversification for investors.

Singapore’s two popular ETFs

There are two ETFs tracking the Singapore stock market benchmark, the Straits Times Index (SGX: ^STI); they are the SPDR STI ETF (SGX: ES3) and Nikko AM STI ETF (SGX: G3B). Their investment objectives are similar, which is to replicate as closely as possible, before expenses, the performance of the Straits Times Index.

Whenever there are changes to the constituents of the index, the STI ETFs would be refreshed as well. Come Friday, the two ETFs have to make the necessary adjustments when Dairy Farm International Holdings Ltd (SGX: D01) replaces StarHub Ltd (SGX: CC3) on the index.

Even though the objective of both the ETFs are the same, there are two key differences, namely, the expense ratio and tracking error, that investors have to keep in mind.

  SPDR STI ETF Nikko AM STI ETF
Listing Date 17 April 2002 24 February 2009
Manager State Street Global Advisors Singapore Limited Nikko Asset Management Asia Limited
Expense Ratio 0.3% p.a. 0.33% p.a.
Annualised Tracking Error 0.0451% 0.21%

Source: Respective fund documents

The SPDR STI ETF edges out its counterpart with lower expense ratio and annualised tracking error. The expense ratio is the annual fee that ETFs charge their unitholders while the tracking error shows the difference between the performance of an ETF and its underlying index.

Since 2002, the SPDR STI ETF has produced an annualised return of 3.8%, excluding dividends. With dividends added to the fray, the annual return goes up to 7%. This means that investors can double their money almost every 10 years, according to the Rule of 72.

Ways to buy the ETF

There are three main ways to purchase the ETF. The first is by buying it like a normal stock through the stock exchange; the second is through your Central Provident Fund (CPF) account; and third is by using a regular savings plan (RSP).

To invest through the stock market, you need to have a brokerage account. You can head here to learn how to open one. To understand how to go about investing your CPF funds, you can check out the article here.

RSPs, which are offered by OCBC, POSB, Maybank, and PhillipCapital, allow investors to start investing with as little as S$100. You can visit the websites of the various banks and brokerages for more information on the RSPs.

The Foolish takeaway

ETFs offer investors the option to start investing with very little money. I hope this quick comparison between the two STI ETFs has helped new investors choose the better one to kickstart their investment portfolio.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. The Motley Fool Singapore has recommended shares of Dairy Farm International Holdings Ltd. Motley Fool Singapore contributor Sudhan P doesn’t own shares in any companies mentioned.