#1 Low cost – management fee and sales charge = less than 1% per year
If you understand compound interest and its effect, you would know that your investment capital would exponentially. Likewise, if compound interest can work for you, it can work against you as well. I am talking about fund management fees. They have eroding effects too. It makes a lot of sense to spend as little as possible for fund fees. This is one important criteria when you invest in any funds. STI ETF currently charges about 0.3% management fee, comparing to similar unit trusts which charged between 0.75-1.5%. This means that you have 100-500% of savings right from the start! And this has not factored in the compounding effect. Talking about sales charges, Fundsupermart currently charges 1.25% for the unit trusts and while you buy STI ETF from a broker, POEMS charges 0.18% to 0.28%. If you just buy a lot which cost you $3,000 and the minimum brokerage fee is $25, your percentage cost would be 0.83%, still lower than the unit trust’s sales charge.
#2 Growing Singapore economy
As a Singaporean, I am happy in where I am as I see Asia as an emerging affluent continent. Singapore being a business hub, would likely to flourish with Asia. I have faith in the economy and hence, buying into Singapore companies is one of the best way to participate in the growth of Asia. We have many established companies that have began expanding their influence in Asia and other parts of the world. Giants like Singtel, KepCorp, SembCorp, DBS, UOB, etc, are well managed and financially sound (I am not suggesting these are stocks to buy, they are just example to illustrate my point). As Asia grows, I believe they would gain some market share as well. And right now, they have consistent cashflow as they provide services that Singaporeans pay for everyday. To be able to buy into all these companies would require a large capital. But with STI ETF, you would be able to partly own the top 30 companies in Singapore, the bluest chips of all.
#3 Good Diversification
The STI has a mathematical methodology to identify the top 30 companies in Singapore. There will be periodic review of the constituent stocks and any replacement of the top 30 can be effected. STI ETF would track this index closely, and make adjustments accordingly. As such, you would always buy into the top 30 companies at any one time. You do not rely on any single company for investment growth. And in this 30 companies, they cover many industries and sectors. These are forms of diversification. This is especially important if you do not know how to pick stock.
#4 Buy the index if you cannot beat it
It has been said that most fund managers cannot beat the benchmark index. Is it true? Kay from Moneytalk has did a comparison between STI ETF and the similar unit trusts. Taking the dividends from STI ETF into consideration (without factoring the fund costs for all funds), the STI ETF indeed outperformed the fund managers. There is a saying, “if you can’t beat them, join them”! If the fund managers cannot beat the index, it would be wiser to buy something that replicates closely with it – STI ETF.
Conclusion
Comparing to unit trusts, you can buy STI ETF at a cheaper rate and have a potential higher return. To me, it isn’t a difficult choice. Another important thing I want to warn you is that you still have to buy at the right time. Do not expect to buy the STI ETF at the height of a bull market and expect to see profits. Timing is important. I would like to quote Warren Buffett, “be fearful when others are greedy and be greedy when others are fearful”.
Hi Alvin,
I am new to investment and have been accessing various platforms (including your blog) to learn more about investment before plunging in.
There has been lots of talk on ETI lately. I just attended an SIAS seminar on ETF yesterday. While we understand the benefits of investing in ETFs, I am wondering if this is a good time to buy STI ETF as its price is pretty high. Lets say I have $10.000 cash availble to put into investment – is it wise to use this amount to invest in STI ETF in one lump sum or is the Phlip SBP a better option for now?
Appreciate your advice.
Hi niseko, this is a kind of decision you would have to make yourself as no one knows better about your financial situation, risk appetite, etc. what is your investment horizon? What would you do or feel if you are wrong and your 10k becomes 5k? My advice is if you are ok with the worst case scenario, then invest. If not, then stay away.
I suggest dollar cost averaging for smaller amounts into unit trusts even though expense ratio is slightly higher…..but if you buy just a few lots of etf you also incurr the brokerage….been dca into aberdeen singapore fund for the past few years….still up despite the violiatity
Hi Alvin
Could you share what is the annual yield of STI ETF. I intend to buy via broker firm.
hi Lisa, the divideld yield is about 3 percent but if you also consider gain in net asset value of the fund, the average annual rate of return is 8 percent. also
thanks
Hi Alvin, went to look at the comparison between STI ETFs and unit trusts by Moneysmart (study done in 2009). I did a rough estimation of current 5-year and 10-year performance and it seems that there are indeed quite a handful of the unit trusts which beat the STI index’s returns. Wonder if there are anyone else who did this kind of study and can confirm this.
Hey Raymond, you have given me a good idea. I should run a check on Singapore unit trusts performance.
Will publish the results soon. Stay tune 😀
Comparing STI index vs Global stock Index, ie.Vanguard World Stock ETF (VT), will buying and holding the latter gives better returns after 10 years?
You would be exposed to currency risks. The gains in Vanguard may be negated by the loss in forex. Nevertheless, a global world stock ETF tends to be more moderate in terms of returns, as it will include well performing countries as well as underperforming ones.
I would say a global stock index is safer than STI Index, but not necessarily giving you better performance.
So can you give me the steps by buy ETF online and how to monitor the growth and also can you let me know if this is the right time?
For lump sum investments, you can go through any brokerage platform to do so. Your broker would be able to assist you to navigate their platform to place orders.
For regular investment plans, you can consider among PhillipSecurities, POSB or OCBC.