ETFS: WHAT ARE THEY AND HOW DO YOU INVEST IN THEM?

WHAT IS AN ETF?

An exchange-traded fund (ETF) is a type of investment fund that is listed on a stock exchange (e.g. SGX).

ETFs are passively managed: they aim to track the movement of a particular index (such as the Straits Times Index) and do not try to outperform the index that they intend to replicate. The idea is to match the performance of the broader market.

WHAT KIND OF RETURNS CAN I EXPECT WITH ETF INVESTING?

As ETFs track an index, the return of an ETF matches that of the index tracked less the ETF’s fees.

It should be noted that ETF transactions incur a brokerage fee typically ranging from 0.08% to 0.28% (with minimum commission fees of $8-$28) and SGX trading and clearing fees. Like unit trusts, ETFs also usually charge a trustee or custodian fee of 0.1 to 0.15% per annum on the NAV of the fund and a management fee of under 1% per annum (Source: SGX)

Returns vary depending on the type of ETF invested in and its associated risk profile— for example, an equity ETF is likely to have higher returns than a bond ETF, which has a lower risk profile.

Some ETFs may also pay dividends. For example, the 5 REIT ETFs on the SGX paid out an average dividend of 5.5% with CSOP iEdge SREIT Leaders Index ETF having the highest 12M Gross Yield at 7.12% for the first quarter of 2024.

Source: SGX

EXPLORING DIFFERENT TYPES OF ETFS IN SINGAPORE

The ETFs listed on the SGX can be broadly divided into these categories

Equities

• ETFS that track an equity-related index like the Straits Times Index

Bonds

• ETFS that track a bond index such as ABF Singapore Bond Index

Commodities

• ETFS that track a commodities index
• Only one commodities ETF in Singapore which tracks the gold spot price

REITs

• ETFS that track various Asian and Singaporean REIT indexes
• Only five REIT ETFs currently listed on the SGX

WHAT IS THE STATE OF PLAY OF THE ETF SINGAPORE MARKET?

ETFs are gaining popularity in the City-State.

In 2023, daily turnover for SGX-listed ETFs in 2023 crossed S$13 million, according to Singapore stock market data.

The data also showed that for the year 2023, five new ETFs — all equities focused — launched on the SGX and had collectively attracted S$765 million in net inflows.

The information also revealed that as of end-2023, there are 43 ETFs listed on the Singapore stock exchange with combined AUM of a whopping S$10.6 billion.

Source: SGX

According to SGX Securities data points, retail and institutional clients ETF adoption grew in tandem, rising 96% in the span of 4 years to S$2.97 billion and S$6.69 billion respectively in Dec 2023.

Source: SGX

WHAT ARE THE MAIN ADVANTAGES OF ETF INVESTING?

Low Fees

• ETFs’ fees can be much lower compared to actively managed unit trusts.
• Without the need for active fund managers and related researchers for stock selection, cost savings can be passed on to investors.

Instant and Convenient Diversification

• Investing in an ETF can be equivalent to investing in an entire basket of securities, thus providing instant diversification.
• Investors will not have to make multiple investments to achieve diversification.

Less Time

• Since ETFs are part of a passive investment strategy, less research and due diligence may be required compared to actively picking out securities.
• Less time is needed to monitor performance since ETFs are typically held on a long-term horizon

WHAT ARE THE MAIN DISADVANTAGES ASSOCIATED WITH ETF INVESTING?

Potentially Higher Costs

• Although ETFs generally have lower fees compared to actively managed funds, they may still have higher costs than buying individual stocks/ bonds due to management fees.

Potentially Missing Out on Growth Opportunities

• ETFS do not cover the entire range of the market.
• Investors may miss out on growth opportunities from smaller stocks that are less represented on indices.
• Since ETFs only aim to match market performance and not beat the market, potential returns are limited to the performance of the underlying index.

Lower Dividend Cashflow

• Investing in equity ETFs is likely to yield lesser dividends compared to when investing in dividend stocks.

Lack of Control

• Less control over your investments. For example, if an ETF follows several particular securities that comprise an index and they suddenly fall in price, investors cannot reduce their exposure to only those securities.

WHAT ARE THE MAIN RISKS INVOLVED WITH ETF INVESTING?

Market Risk
Investing in ETFs is investing in the broader market, meaning your investment is still subject to market risk.

Liquidity Risk
ETF markets may become illiquid in times of high volatility, particularly ETFs tracking less-liquid indexes. The result could be a distortion in the prices of the ETF shares.

Tracking Risk

• ETF performance may not match the performance of the underlying index perfectly.
• While an ETF attempts to perfectly mimic the performance of the underlying index, there is usually some degree of tracking error.

THE KEYS TO CHOOSING AN ETF FOR YOUR PORTFOLIO

If you’ve already determined that you want to have some passive investments in your portfolio, then ETFs can be a good option.

Here are a few key tips when choosing an ETF to invest in.

Key #1: Know which asset class you want to invest in

• Understand which asset class (ie equities, bonds, REITs, gold) matches your risk profile best.
• For example, invest in an equity ETF for greater potential returns but at a higher risk or invest in a bond ETF for lower returns but at a lower risk.

Key #2: Aim for the lowest fees and expense ratios

• Even a small difference in fees can make a big difference over the long-term.
• Since most ETFs are competitive on share price, choose the one with the lowest costs.

Key #3: Pay attention to tracking error

• Tracking error indicates how closely an ETF is tracking the underlying index.
• Tracking error figures should be published on an ETF’s fact sheet or prospectus.

Key #4: Look at liquidity

• To mitigate liquidity risk, look at an ETF’s trading volumes which are publicly available on the stock exchange’s website.

ETFs have helped bring investing to a whole new generation.

For those who shy away from stock picking and actively choosing securities, ETFs can allow them to invest in the broader markets at lower costs. Investing in ETFs is a growing worldwide investing phenomenon.

AT A GLANCE: ETFs, STOCKS + UNIT TRUSTS COMPARISON

HOW TO INVEST IN ETFs

The common ways to invest into ETFs include through:

– Brokerages
– Online trading platforms
– Roboadvisors.

If you are interested in adding ETFs into your portfolio, start your account with us at Standard Chartered’s Smart Online Trading Platform.