The new ETF will mimic the stock holdings of the Morningstar Singapore Yield Focus Index. With that in mind, it’s worth spending the time to understand how the stocks are selected. The 30-stock index applies three main criteria to Singapore-listed companies: business quality; financial health; and dividend yield.
We have explained in detail what the three main criteria are for the selection of blue-chip stocks for the index. Let’s do a quick summary for easy reference in the future.
1. Business Quality
The article explaining the details can be found here. In this criterion, the index provider looks for companies with an economic moat. This trait is important as an economic moat protects the income stream of the company from erosion. An economic moat can include the following characteristics: network effects, intangible assets, cost advantages, switching cost and efficient scale.
One way to measure the business quality of a company is by calculating the return on invested capital (ROIC) for the company.
2. Financial Health
Details on the screen for financial health are found here. In short, this criterion looks at a company’s balance sheet to understand how healthy it is. There are a few ways to do this: 1) Assets should be greater than liabilities 2) Net cash/debt position 3) debt to asset ratio. All three of these metrics shed light on a company’s financial health which is imperative to ensure that the company builds a sustainable business.
3. Dividend Yield
The detailed description of the dividend yield criterion can be found here. The fund manager believes that dividends yields provide a glimpse of a company’s cash flow. This criterion doesn’t stand alone, instead of allowing investors an indirect method to check the soundness of the business and its financial health.
Additional notes for investors
In summary, the Phillip SING ETF will include companies that can only meet these three criteria which should allow for the selection of sound and solid companies. The ETF further complements the criteria above by setting a maximum weighting of 10% for each stock.
For the income investors, Phillip SING ETF will be paying out dividends semi-annually.
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The Motley Fool Singapore contributor Esjay contributed to this article. Esjay does not own any of the shares mentioned.
The information provided is for general information purposes only and is not intended to be personalized investment or financial advice. Motley Fool Singapore writer Chin Hui Leong does not own any of the shares mentioned.