Here’s Why You Should (Or Shouldn’t) Invest In The Straits Times Index ETF
If you’ve just started working, and you’re looking to kick-start your investment journey, you may have already heard of the Straits Times Index (STI) ETF. It’s an appealing proposition for the beginner investor: just park some money aside every month, and passively wait for the magic of compound interest to build your nest egg over time.
However, it may not be as simple as that. Before you start investing in the STI, here’s what you need to know about it.
What is the Straits Times Index ETF?
An Exchange Traded Fund (ETF) is an investment fund that pools investors’ money to buy a group of stocks, bonds or other investments. ETFs are typically passively managed to track an index. This means that the fund manager of an ETF will replicate an index, rather than selecting individual stocks or assets to buy or sell.
A stock index is a number that is calculated from the prices of a group of stocks, to be used as a measurement of a particular section of the stock market. The STI tracks the performance of the top 30 companies listed on the Singapore Stock Exchange (SGX). An STI ETF will therefore replicate the STI by buying and selling stocks to mirror the composition of the index.
How to invest in the STI
You can invest in either using the following methods:
1. Buying directly through the SGX
Like regular stocks, ETFs can be bought through the SGX. You’ll need an account with a brokerage firm and a Central Depository (CDP) account. You can set up your CDP account by completing this form, or through your brokerage firm.
2. Investing through monthly investment plans
If you don’t have a lot of capital, consider monthly investment plans. They allow you to invest with as little as S$100 a month, as well as help you apply a dollar cost averaging approach to the STI. The plans available in Singapore are:
- Maybank Kim Eng Monthly Investment Plan
- OCBC Blue Chip Investment Plan
- POSB Invest Saver
- Phillip Share Builders Plan
3. Investing with your CPF
You can also use your CPF Ordinary Account (OA) to invest in the STI. To do so, you’ll need to open a CPF Investment Account with either DBS, OCBC or UOB.
Keep in mind, though, that your CPF account is basically a risk-free investment, as your returns are guaranteed by the government. You’ll get no such guarantee when you invest in the STI, and may even experience losses in years of economic downturn.
Over the short term, leaving your money in your CPF OA may provide better returns than the STI (for instance, the SPDR STI ETF only had an annualised return of 2.69% in the past 3 years, while this year’s CPF Ordinary Account interest rates go up to 3.5%). However, over the long run, the STI can possibly generate higher returns compared to your CPF.
Why you should consider investing in the STI
Here are four reasons to consider investing in the STI:
1. Allows you to diversify your portfolio with little capital
If you don’t have a lot of capital to invest – say, just S$1,000, or even S$100 – then investing in the STI would be a good way to instantly diversify your portfolio. Even with a small amount of capital, you’d be able to invest in Singapore’s 30 biggest companies. Diversification reduces the risk of your portfolio being greatly affected when one of the stocks in your holdings performs badly.
In contrast, if you were buying individual stocks directly, you would need much more capital to build a similarly diversified portfolio. With S$1,000, you’d only be able to invest in single stock; spreading it among 30 companies would not be possible.
2. Little effort and investing knowledge required
If you’re a beginner investor, the prospect of having to pick a stock may be intimidating. In fact, if you’re new to investing, you should think twice before picking individual stocks to invest in. In the US, even professional stock-pickers consistently underperform the market. Investing in the STI is therefore a good way for beginner investors to get into the stock market without having to pick individual stocks.
On the other hand, even if you’re comfortable picking stocks, doing so still requires a lot of research. You may need to spend hours poring over annual reports or other research material to determine if a stock is worth investing in. If you don’t want to (or simply can’t) devote the time and effort to do so, you should consider investing in an ETF.
3. Decent returns
While past performance doesn’t guarantee future results, the STI has historically delivered decent returns. The SPDR Straits Times Index ETF has an annualised return of 7.09% (including dividends) since its inception in 2002. If you had invested S$10,000 in April 2002, it would have grown to around S$18,779 in June 2018 – and this excludes dividends.
4. Low management fees
Investment funds that are managed by professionals generally charge ongoing management fees. The upside of investing in an STI ETF is that it charges relatively low management fees. The SPDR Straits Times Index ETF has an annual expense ratio of 0.30%, while the Nikko AM Singapore STI ETF has an annual expense ratio of 0.33%.
In contrast, other investment funds like unit trusts charge higher annual fees of around 0.5% to 2.5%. Such a small difference may not seem like much now, but it can eat into your investment over time.
Here’s an example of how the expense ratio can impact your investment return over time, assuming a return of 8% every year:
However, the STI lacks diversification
While investing in the STI does allow you to diversify your investment into 30 companies, around 40% of the index is comprised of just three companies – local banks DBS, OCBC and UOB.
This can defeat the purpose of diversification. When developing a diversified portfolio, it’s not enough to diversify between different companies; you’ve got to diversify across other different industries as well.
If the banking industry in Singapore performs badly, over 40% of your portfolio will be affected.
Additionally, while the STI does have international exposure, most of its revenue comes from Singapore or the Asia Pacific region. According to SGinvestors.io, the STI has the following geographical revenue exposure:
- Singapore: 47%
- Asia Pacific (excluding Singapore): 46%
- Europe, the Middle East, Africa, the Americas and the rest of the world: 7%
That’s a large focus on the local and regional economies – if either underperforms, so will the STI. Not only that, any income derived from international exposure relies on Singapore’s competitiveness on the world stage – if local Singaporean companies cannot grow or sustain their operations overseas, the STI may underperform.
Should you invest in the STI?
Despite its heavy focus on local banks and lack of geographical diversification, investing in an STI ETF is a good way for beginner investors (or investors who prefer a passive approach to investing) to get into the local stock market without having to pick individual stocks.
However, instead of putting all your proverbial eggs in a single STI basket, you may want to limit your investment in the STI to only a fraction of your portfolio. Consider diversifying with other investments that will expose you to different industries and regions. Other ETFs that are listed on the SGX – such as the US-based SPDR S&P 500 ETF – may help you achieve greater diversification.