My STI ETF Survived the Sub-prime Crisis

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I have mentioned that I have been putting aside $400 every month into STI ETF, through POEMS Sharebuilder plan.

I started the investment about 2-3 years ago and only contributed $200 per month. It was only about mid-2009 that I increased the contribution to $400.

We all know that due to the US Sub-prime crisis, the market took a beating and plunged. My STI ETF sank too. But I held on to the Sharebuilder plan, believing that dollar cost averaging will work better for me in a down market. Dollar cost averaging (DCA) is to use a fixed sum of money to buy a particular shares on a regular basis, instead of a lump sum investment. The strategy works like how Singaporeans go for shopping. When there is a sale, Singaporeans will buy in bulk the items that are on discount. Likewise, with $400 each month, I buy more when the stock price falls, and buy less when the stock becomes more expensive. Overtime, I get a big discount for the shares I buy.

You may say that I could have profited more if I have bought near the low of STI but I must say I did not know when the market will bottom and never will I in the future. What I must emphasized is that ordinary folks who do not know how to time the market, can invest in this way and gain very decent profits. Since it is so simple and relatively safer than many other strategies or asset classes, it is highly recommended for people who do not have the interest to follow the market but like to profit from equities.

Let’s talk about real life results: As of Dec 09 holdings, I have 3077 shares of STI ETF and a DCA price of $2.5448 for each share. STI ETF closed at $2.99 today. This would translate to a positive gain of $1369.63.

You may feel that the gain is small. But I want to stress that I have a gain despite buying near the peak and went through the entire market crash in 2007-08. How many people have their investment in the positive territory now? And I did not time the market. It was robotic, the bank just GIRO my contribution to the plan without me doing anything. Anyone can do it! If this is the worst time, my STI ETF will even perform better in better times.

If you are not convinced, do check out the annual reports released by SPDR. For your convenience, I took the performance table from the latest 09 annual report:

I feel that it is quite impressive if you compare to many other managed funds or unit trusts. And the management fee is only 0.3% per annum.

If you ask me if DBS STI ETF is better, I would say both are the same. But I would prefer StreetTracks because it has higher liquidity than DBS.

Liquidity is important when you want to sell your shares.

  • Hi Alvin, thanks for sharing your results for the shareholder plan. Can you let me know if STI ETF provide dividend? If so how much?

  • STI ETF will pay out dividends twice a year. Once in Jan and once in June. The last dividend given was on 20 January 2009, where the Fund declared an interim dividend distribution of S$0.05 per unit. The fees for the fund (0.3%) is deducted from the dividends. The declared dividend amount has taken the deduction into consideration.

  • Hello Alvin,

    if you started increased (by 100%!!) your investment starting second half of 2009, this is not “dollar averaging”.

    In fact you started increasing your investment after the market starting picking up.

    I do not criticize your strategy, I just want to emphasize that you had to choose a time when you thought the market would not go down further.
    Dollar averaging should an automatic method: the same amount is invested every month regardless of the market that month.

  • Charles, pls understand that I did not purposefully increase my monthly investment when the market picked up. I increase because my finances allow me to and I intend to stay at the same amount until I can further increase my monthly contribution. I did not even know if the market was turning up and I wasn’t predicting it as well.

    If I know when the market will bottom, do you think I will be doing dollar cost averaging? I will make more money by plunging as much money as I possibly have into it. It seems like you are speaking with hindsight bias.

  • Hi Alvin, do apologise for this newbie question:

    If a $100/mth investor is charged $6.42 as handling fee, wouldn’t the cost (or brokerage or whatever to call it) be 6.42% (6.42/100) p.a.? Looks pretty hefty!

    Or did I get my sums and understanding wrong?

    Thanks.

    W

  • W, you are absolutely right!

    6.42% is too high as an expense. Trying to keep it around 1% will mean that you have to put in $600/mth.

  • Thanks for the response, Alvin!

    As much as I really want to put money into STI ETF, $600 is beyond my current budget. May have to look for cheap UTs …

    W

  • Hi Alvin,

    The yield of the STI ETF is only 2% based on current price. Is it still worthwhile investing in the sti etf ?

    Thanks
    P

  • I don look at yield when investing stocks. I look for capital gains. If you are looking for dividends or cashflow, you need to have a sizeable capital to get a decent returns constantly.

  • Hi Alvin,

    I’m 20 this year and about to enter NS soon.

    I didn’t know much about the various RSP out there before this and have recently signed up (~ 1 month ago) for an investment-linked insurance policy with Great Eastern as a long-term saving plan for the future, (as quoted by the financial planner). I’m placing about $150 monthly premium into it. But i realised that due to the management charges, policy charges and insurance charge, the return is very, very little. The benefit illustration showed a projected 5%-9% return which is about only $4k -$13k for a 20yrs time span! Currently they would invest my money into 4 funds each with a management charge of 1.5% each! with a monthyly policy charge of $5. wouldn’t the total reduction of yield be 9% excluding insurance
    charge?!

    I was just wondering if I should terminate this now (i might lose about $130 since I only paid 1 month premium so far) and start this up on this SBP first at $200 and increase my monthly investment later in life when I enter the workforce? I know the charge would be quite high if I invest only $200 monthly but I believe the returns for this would be much greater than my current investment-linked policy right?.

    Or are there other ways for me to go about doing RSP for long-term investment now?

    I just really exciting to do some lower-risk investing now! Thanks a lot!

    Cheers,
    Bernard

  • Hi Bernard, it is hearterning to know someone as young as you start to practise financial responsibility. Investing $200 per month on SBP would cost around 3% charge (~$6 brokerage fee). It is rather high but come to think of it, I started with $200, and gradually increased my contributions as my income increased. I am glad that I started as early as I could, even though the cost was rather high initially. But sometimes you need to get going and eventually give you the momentum to do more in the future. Moreoever, I am more confident that the ETF can get a better return than an unit trust.

  • Hi Alvin,
    I’m 22 this year and I have just entered the workforce.
    Just like Bernard I was approached by a GE financial planner and advised to buy a ILP.On hindsight now,it’s fortunate that I decided to take some time to consider.I have just checked out the POEMS website and will be looking to start with maybe $200 a month.I do have several ‘nubbish questions’ since I’m new to this so pls bear with me.Brokerage fees=Management Fees?And how many times do we pay annually?Are there any other charges?I understand that Dividends are paid out twice a year but if we decide to sell wadever shares we are holding,there should be other charges as well right?

    Cheers,
    Shawn

  • Eugene – I got ETF because I want to buy the strength of SG big companies. You can buy individual stocks if you want, but you would have to stock pick the good ones. If you do not know how to do it, you should either learn or just stick to ETF. If you pick the right stock, you can earn more than the ETF. But if you pick the wrong one, you will lose more than the ETF.

    Shawn – brokerage fees and management fees are separate. The former goes to your broker, while the latter goes to the fund manager. Brokerage fees is at least $6+ every month when you use sharebuilder plan. Management fees are directly deducted from the fund. When you sell the shares, you will incur normal brokerage fees, at least $25.

  • I did this for unit trusts and made a small profit of 8K over the past 2 years….now I am putting in 3 to 4K a month as I am generally bullish on equities in the next 5 years…

  • How is the 34.58% derived and what does it mean? Annualised inception leads me to think that it has achieved 34.58% pa from 2002 to 2009?

    Their latest report now shows 9.28% (with dividends reinvested). One year can make so much difference?

    Would like some clarification if anyone can be so kind to offer it. Thanks.

  • Hi Seth, it is true the annualised figures vary alot. This is especially so for young funds like STI ETF which was started less than 10 years. With a short time span, the sample size is small and results vary greatly from year to year. In my opinion, at least 30 years is required to have a good gauge of the performance.

  • Hi Alvin,

    That can’t be right – 34.58% pa means the STI should be astronomical on 30th June 2009! On the fund’s inception April 2002, STI closed at 1,725.37. On 30th June 2009 as stated in the report, it closed at 2.333.14.

    For 34.58% pa, the STI should have closed at a whopping 13795! Even including the deviation as the ETF cannot track the STI perfectly, it cannot be such a huge difference. I suspected that it’s total growth of 34.58% since inception, and true enough, I got a figure of 2322.00 when I multiplied 1,725.37 by 1.3458 which is much closer to the historic STI figure.

    The other recent annual reports show between 8 to 9% per annum growth which is much more likely and realistic. Just to confirm my theory that they printed wrongly, I took another annualised return since inception and matched it with historic STI figures and it matched up.

    Can’t believe they let slip such a big error!

  • By the way, I realised my figures are very slightly off as I found out I was looking at historic prices by month.

    Anyway, if we assume the ETF to track the STI quite well, the STI has done almost 6% pa since its start 23 years ago. Wonder if there’s a way to measure the return based on a RSP amount. Do we just use a calculator and put PMT = amount of annual investment? Don’t think that sounds right.

    If we include fees, charges etc, wouldn’t the return be quite low as well for a time horizon of 23 years? Or could one argue that we are just heading out of a recent recession?

  • Okay sorry to spam your comments, but I realised again that the return is assuming dividends are not reinvested.

    Well, certainly looks like a good place to invest if one is not investment savvy. The only draw back is that POEMS Sharebuilder plan’s charges is expensive for smaller monthly amounts. Quite a drawback to people who can only invest about $100 – $200 a month.

  • Hi Seth, thanks for your effort to verify the figures.

    Yes, indeed. The charges at $6+ per transaction is not alot in absolute term, but it is a big percentage if you invest minimally S$200 a month, which work out to be 3%.

    In my opinion, it is a cost worth paying if (1) one is not disciplined to save every month and (2) even with a bigger sum of money, you may not be trained to get in the market at the right time. With (1) and (2), you can make a bigger loss than the $6+ per month.

    Using Dollar Cost Averaging is about the duration of investment. The later one starts, the smaller the profits.

    There is nothing perfect in this world. We have to ensure the ultimate benefit is better than the drawback. If we have to wait for the perfect, we will not do anything in life.

  • Hi Alvin,

    Do you have any idea when is the dividend issued per year for STI ETF? Also, do you know is how many times is that?

  • on 20 January 2009, where the Fund declared an interim dividend distribution of S$0.05 per unit

    On 24 July 2009, the Fund declared a final dividend distribution of S$0.04 per unit.

    So $0.09 per unit in 2009.

    On 18 January 2010, the Fund declared an interim dividend distribution of S$0.03 per unit.

    The next dividend payment would be in Jul 10.

  • Alvin, in your opinion, for someone who have not invested in STI ETF yet, would it be advisable for him or her to start investing in the STI ETF now? I have been waiting for a $2.90 price for about 1/2 year now.

  • If STI ETF goes to $2.90, it would mean the market is very weak. I am not sure if the current retracement will go down to $2.90, I doubt so.

  • I wouldn’t be able to advise you, as I cannot understand your risk appetite and your ability to manage stocks when they undergo a correction. To me, STI would go up some time in the future. But, I have other choices of stocks that would potentially give me more return, with limited capital, I would not put in STI ETF.

  • I wouldn’t be able to advise you, as I cannot understand your risk appetite and your ability to manage stocks when they undergo a correction. To me, STI would go up some time in the future. But, I have other choices of stocks that would potentially give me more return, with limited capital, I would not put in STI ETF.

  • May I ask, if I intend to invest about $1000 a month into STI ETF, would it be better to do so through the POEMs Sharebuilder plan or buy the units via the Unit Share Market? My analysis:

    Sharebuilder plan:
    Pros: Lower commission of $6.42; automatic RSP
    Cons: shares are held by Phillip Securities as custodian (? risk of default); uninvested sums rolled over the next month will push my monthly investment amount to >$1000, increasing the commission from $6.42 to $10.

    Unit Share Market:
    Pro: Shares are under my own CDP; can choose when to enter the market
    Cons: higher commission (POEMS charges $10), possible lack of liquidity

    Can anyone advise? If I buy odd lots from the Unit Share market, is the asking price higher? and how’s the liquidity there? Thank you.

  • May I ask, if I intend to invest about $1000 a month into STI ETF, would it be better to do so through the POEMs Sharebuilder plan or buy the units via the Unit Share Market? My analysis:

    Sharebuilder plan:
    Pros: Lower commission of $6.42; automatic RSP
    Cons: shares are held by Phillip Securities as custodian (? risk of default); uninvested sums rolled over the next month will push my monthly investment amount to >$1000, increasing the commission from $6.42 to $10.

    Unit Share Market:
    Pro: Shares are under my own CDP; can choose when to enter the market
    Cons: higher commission (POEMS charges $10), possible lack of liquidity

    Can anyone advise? If I buy odd lots from the Unit Share market, is the asking price higher? and how’s the liquidity there? Thank you.

  • Now that Standard Chartered offers no minimum brokerage, would it be more cost effective to instead DCA using Nikko AM STI ETF 100? (assuming saving amount >$300 per month)

    There is the benefit of needing to pay POEMS the dividend reinvestment charge and corporate action charge.

    The biggest problem as I see it, is that a board lot of 100 is still too inflexible for small investors.

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