When it comes to safeguarding your money from the effects of inflation, putting all your cash in a savings account isn’t the best idea. Money in the bank is like parts of the human anatomy under cold water. They shrink. (I’m talking about fingers, duh. Get your mind out of the gutter.)
To beat inflation, you have to invest your money. An STI ETF is one of the most popular investment products for investment beginners in Singapore.
Investing via an STI ETF is both low cost and low risk. But how does one get started when one knows zilch about this investing mumbo jumbo? This is precisely why we’ve written this guide – to help you understand how you can start investing using ETFs and give you a step-by-step guide to make it super simple.
- What is an Exchange-Traded Fund?
- What is an STI ETF?
- Why is an STI ETF great for investment newcomers?
- Are ETFs suitable for everyone?
- Getting started on buying the STI ETF – Step by Step
- Lump Sum Investment VS Regular Monthly Investment
What is an Exchange-Traded Fund?
An ETF is a type of asset class, much like stocks or unit trusts. ETFs are listed and traded on a stock exchange. You invest by buying shares of the ETF, essentially owning a tiny portion of the total fund. When you buy these shares at a certain price, and the price goes up, you can sell the shares and make a small profit. You can also earn money through dividends.
An ETF tracks or replicates the performance of a specific index, a set of bonds, a commodity, such as gold or silver, or a basket of assets. In many cases, an ETF tracks a stock index.
A stock index is a group of stocks chosen to represent a section of the stock market. Typically, each country will have one or two major stocks indices representing their market. Some popular ones include the S&P 500 and the Dow Jones Industrial Average for the US, Hang Seng Index for the Hong Kong market and the Nikkei 225 represents the Japanese market.
What is an STI ETF?
For those who have no idea what “STI ETF” refers to, let’s first understand what it is: An Exchange-traded Fund (ETF) tracking the Straits Times Index (STI).
In Singapore, our stock index is the Straits Times Index, or STI.
With a history dating back to 1966, the STI tracks the performance of the top 30 companies listed on the Singapore Exchange. The 30 STI stocks represent five different sectors and 19 different industries, chosen to best depict Singapore’s diverse economy. The STI is represented by some of the largest businesses incorporated in Singapore, such as DBS, UOB, Singtel, Keppel Corporation and CapitaLand Limited. Of course, the tides change every year and some companies may be removed from the list while others are included.
The composition of the STI is reviewed quarterly and it must be noted that each stock has a different weight or impact on the STI. As of 17 Jan 2019, the current top constituents are tabled below, with their respective market capitalisation and industry.
|DBS Group Holdings Ltd||15.85%||Finance|
|Oversea-Chinese Banking Corporation Limited||13.49%||Finance|
|United Overseas Bank Ltd. (Singapore)||11.73%||Finance|
|Singapore Telecommunications Limited||7.85%||Telecommunications|
|Jardine Matheson Holdings Limited||6.58%||Holding Firms|
|Hongkong Land Holdings Limited||3.79%||Real Estate|
|Jardine Strategic Holdings Limited||3.11%||Holding Firms|
|Keppel Corporation Limited||3.08%||Engineering Services|
|CapitaLand Limited||2.86%||Real Estate|
|Thai Beverage Public Co. Ltd||2.45%||Food & Beverage|
An STI ETF is precisely, an investment fund that seeks to replicate the performance of the STI. This is done by investing in as many of the same companies that make up the STI, and trying to ensure the same weightings. So, for example, if the STI increases the weight of OCBC, then those managing the STI ETF will increase their investment in OCBC.
Why is an STI ETF great for investment newcomers?
Investing in an STI ETF is great for 3 main reasons:
1. Exposure to several blue-chip stocks: low-risk investments at low-cost
When you invest in an ETF which tracks a share index, you gain exposure to the performance of the index. And when it is tracking a national stock index, that means you’re technically investing in a country’s economy. As a long-term investment, an STI ETF is seen to be low risk, since Singapore is expected to keep growing over time.
Another way of looking at investing in an STI ETF is being able to invest in various blue chip stocks without needing a lot of investment capital. This means that you do not have to spend money buying the stocks of the individual companies that constitute the index, which can be expensive when done individually.
Moreover, most new investors have little no clue how to pick the right stock, so investing in an index ETF gives them a broad exposure to all these individual companies instead of investing their limited funds in one single stock. This helps the beginner investor spread the risk and avoid suffering huge losses if one industry/company did not perform well for the year.
2. Buy and sell STI ETF shares easily and quickly
Being listed on a stock exchange also means the public can have easy access to buy and sell STI ETF units as long as it’s a market trading day. Although investing in an STI ETF is usually seen as a long-term strategy, having the option to buy and sell easily is always welcome, so you can take advantage of market fluctuations. For example, if the STI is on a downtrend, it may be a good opportunity to buy more STI ETF shares. On the other hand, if the STI is rising, you can take advantage of this, sell your STI ETF units off real quick and reap the returns (if you made a profit) in a matter of days.
3. Fees and charges are lower for STI ETF
Because the purpose of the STI ETF is just to replicate the performance of the STI, the management fees are significantly lower compared to actively managed funds whose main purpose is to generate profit. In other words, the managers behind an STI ETF aren’t obliged to ensure you don’t lose money. As a result, no sales charges are incurred when you sell your units. Do note that you’ll still be subjected to brokerage commissions and fees, just like everyone else.
Are ETFs suitable for everyone?
Like every type of investment, buying units of ETFs come with risks and may not be suitable for everyone. The first thing you need to know is that ETFs are not principal-guaranteed – there is still the possibility of losing a substantial amount of money, or even all that you’ve invested. So remember that investing in the STI ETF isn’t some get-rich-quick scheme. It’s not even a get-rich-slowly scheme since, as one of the lower risks products you could invest in, the returns are generally not going to be that spectacular either (but it’s still better than the measly interest you’ll earn from the banks).
So before you invest in the STI ETF, there are two simple questions to ask yourself:
- Are you prepared to hold onto your investment for longer periods of time?
- Will you be able to live on without the money you’ve set aside for investment?
ETFs will take a while before you see any real gain and therefore, like any long-term investment, should be bought with money that you can afford to set aside. Don’t be tempted to liquidate your investment for at least 4 to 5 years if you want to see actual returns.
Getting started on buying the STI ETF – Step by Step
Step 1: Choose which STI ETF to invest in
Ready to invest? Basically, the STI ETF trades like a stock on the Singapore Exchange. Do note that there are 2 STI ETFs to choose from, namely the SPDR STI ETF and the Nikko AM STI ETF. Their key differences are as follows:
|Fund Name||SPDR STI ETF||Nikko AM STI ETF|
|Date of inception||11 April 2002||24 Feb 2009|
|Fund size||SGD $303,241.2 million||SGD 243.16 million|
|Annual returns (5-year)||3.62%||4.43%|
|Performance since inception||7.52%||11.82%|
|Annualised tracking error||0.051%||0.22%|
Tracking error indicates how closely the STI ETF was able to replicate the STI’s movements. The lower the number, the more accurate the fund manager is. Higher tracking errors may be a good thing if it results in unexpected profits, but it could also result in unexpected losses.
Although there are two STI ETFs to choose from, there’s nothing to stop you from investing in both, of course!
Step 2: Decide how to buy units of your chosen STI ETF
There are 2 ways in which you can purchase units of the STI ETF. One of it is through a brokerage account, and the other is through a Regular Savings Plan.
Option 1) Lump sum investing through brokerage accounts
You can approach one of the many brokerages in Singapore to open a brokerage account. Some popular options include Phillip Securities, DBS Vickers and OCBC Securities.
To open a brokerage account, you first need a CDP account as well as a bank account. Your broker will assist you with the documents required to open an account.
After your account is set up, you’d need to decide how much you want to invest in the STI ETF. You can look for the STI ETF on your trading platform to put in a trade. 1 lot on SGX is 100 shares, so if the price of the STI ETF is now $3.57, 1 lot will cost you $357 + trading costs and commission.
And there you go! Once the trade is done, you are an investor of the STI ETF.
You’d likely be wanting to monitor the shares now and then and decide on the target price which you want to sell, however the truth is you should just forget about it for awhile and it the market do it’s thing. Once again, this isn’t a way for you “flip” a stock like you see in the movies. It’s a longer time, lower risk but lower return product. Just remember that when calculating your profit and loss, take into account all the trading costs involved as well as the dividend payouts (if any).
Option 2) Dollar-Cost Averaging investing through a Regular Savings Plan
If you prefer not to put in a lump sum of money all at once, you can choose a monthly investment approach where you contribute a fixed amount each month for investing through a Regular Savings Plan. Despite the name, this is not an actual savings account and your money is not 100% principle-protected. There is still a very low risk involved.
For this method, you do not even need to set up a CDP account. Simply apply for it through your iBanking account and you can put in the fixed monthly amount you want to commit to buying the ETF each month. This is known as dollar-cost averaging. The bank will then help you to buy the shares with your chosen amount each month. You only need a minimum of $100 to start investing.
Currently, some of the financial institutions offering this type of plans include:
- POSB Invest Saver
- OCBC Blue Chip Investment Plan
- Maybank Monthly Investment Plan
- Phillip Share Builders Plan
Lump Sum Investment VS Regular Monthly Investment
Now, many of you might ask, “Which method is better? Buying lump sum or invest using the monthly investment plan?”
Well, investing using a monthly approach allows for a smaller starting capital. Most people who choose a lump sum approach typically invest a large amount of money in one shot to save on brokerage fees and charges.
A monthly approach also takes away the need to try to “time the market”, since the best time to start investing is always now. But don’t just take our word for it, let’s take a look at the difference in returns for both methods using historical prices.
For this illustration, the investment period starts 1st March 2017 and ends on 1st March 2018 with a total investment amount of $3,000. All calculations of profit and loss exclude fees. We’ll be using the historical prices of the Nikko AM STI ETF.
Lump Sum Investment
Andy decides to invest a lump sum amount of $3,000 in the Nikko AM STI ETF on 1st March 2017 for a year. The price of 1 share is $3.17. Since he is buying through a broker, he’ll be able to buy a maximum of 9 lots (of 100 shares each), costing him a total of $2,853 for 900 shares. He is not able to invest the full $3,000 since he cannot buy a fraction of a lot.
At the end of the one year period, he was able to sell his 9 lots of shares at a price of $3.51. His profit for his one-year investment is ($3.51-$3.17) x 900 = $306.
Dividend payouts during this period amount to $74.43, bringing his total profit to $380.43. His return on his initial $2,853 investment is around 13.3%. Remember that we’re excluding fees, so his profit is actually a little less than that.
Regular Monthly Investment
Jenson prefers to invest in the STI ETF in small amounts monthly. In his case, he has decided to put aside $250 per month for a whole year into a Regular Savings Plan. The unique feature of a Regular Savings Plan is that it allows you to buy a fraction of a lot. You still cannot buy a fraction of a share though.
|Month||Investment||Price per share||Shares Purchased|
At the end of the one year period, Jenson sold all his holdings at the selling price of $3.51. His total profit for his one-year investment = ($3.51-$3.39) x 878 = $105.36.
Because he is buying shares on a monthly basis, Jenson will actually earn less dividends compared to Andy, who paid a lump sum. Dividends are paid out per share owned, and for the Nikko AM STI ETF during this period, dividends are paid twice a year. Jenson would have received about $51.10 in dividends, bringing his total profit to $156.46.
His return on his total $2,979.27 investment is about 5.3%.
Looking at the above example, you might think that using a lump sum approach will give you superior returns compared to the regular investment option. With lump sum investing, it’s all about the timing of the buying and selling of shares. Andy lucked out because the price he bought it at was the lowest over the next 12 months. When you expect prices to rise and never fall, lump sum investing will always be better.
With a Regular Savings Plan, there’s no need for guesswork. Anytime is a good time to start investing. That said, the Regular Savings Plan is the better option when you expect prices to fluctuate over time, as most shares, even ETFs do.
|Lump Sum Investing||Dollar-Cost Averaging|
|Large investment capital preferred||Can invest as little as $100 a month|
|Need to “time the market” to maximise gains||Gains are averaged over time|
Ultimately, this illustration shows that investing in the STI ETF just for a year, could earn you at least 5.3% returns. That’s not only significantly higher than the measly 1% interest you get from a fixed deposit account, but it’s also definitely able to beat inflation.
The STI ETF is a good investment tool for those who want to start their investment journey. Because you’re essentially investing in Singapore’s economy, it can be a low-cost, low-risk investment product suitable for even the newest investor. Many investment experts also advocate buying into an index for long-term investment as this approach has been proven to outperform investment funds which are professionally managed. While there are certainly many other types of investment instruments out there, investing in an index ETF does seem to be a good way to start out.
Want to know more about investing in an STI ETF? Ask your questions in the comments below.
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