Last Updated: 31 March 2017
What is STI or the Straits Times Index?
The STI or Straits Times Index is a blue chip (major companies) index of the top 30 companies listed in SGX (Singapore Stock Exchange).
It is the most widely used indicator to represent the general Singapore stock market. When the media mentions that the Singapore stock market went up or down, they are taking reference from STI.
The STI is suitable to represent the Singapore stock market because the 30 companies account for 77.29% of the total market value of listed companies on SGX (as at 30 Jun 2015).
The STI dates back to 31 Aug 1998 when it was first introduced. It was constructed jointly by Singapore Press Holdings (SPH), SGX and a professor from NUS. In 2008, the STI was revamped and FTSE provided their methodology to calculate the index constituents.
The STI components would be reviewed quarterly and are based on the capitalization-weighted approach. This means that the top 30 companies with the highest market value (stock price multiplied by the number of shares) are selected into the index.
The current STI constituents and their relevant index weight are shown in the table (UPDATED: 31 March 2017)
|STI Constituent||Index Weight (%)|
|YZJ Shipbldg SGD||1%|
|HPH Trust USD||1%|
What Is An ETF or Exchange Traded Fund?
Most investors would understand a fund or an unit trust. It is where individuals pool their money together for a fund manager to decide where to allocate the capital and make returns on behalf of the investors.
An ETF is similar to a fund or a unit trust except for these two main differences:
- An ETF is traded on a stock exchange.
- An ETF usually is a passive management while an unit trust involved active management.
1) An ETF is traded on a stock exchange.
This means that an ETF can be bought and sold just like a stock. There is no requirement to invest into the fund via a financial advisor or a funds platform. You just need a stock brokerage account to invest in an ETF.
Since the ETF is traded during market hours, the price of the ETF is continuously quoted, while an unit trust would only have one price for each market day.
2) An ETF usually is a passive management
An ETF tracks a particular index and the fund manager do not make any individual judgement on which stocks or asset to invest in. The ETF fund manager only needs to replicate the stocks determined by the index, and follow the performance as closely as possible.
An unit trust fund manager on the other hand selects the stocks in the portfolio and tries to get a higher return than the index that the fund is bench-marked against.
For example if you are keen to invest in the top 30 companies listed on SGX, which is essentially the STI, you would have to invest directly into the 30 stocks. This would require a large amount of capital and a lot of effort to make sure the portfolio follows the index weights prescribed by FTSE, SPH and SGX.
Here’s a quick video from the Singapore Exchange that explains what an ETF is and how an index ETF like the STI ETF works:
What is STI ETF?
The STI ETF is an ETF that invests in the STI constituents, giving its investors exposure to all the 30 companies that make up the Straits Times Index.
It allows you to invest in just one ETF to get exposure to the companies that make up the STI, thus making it much more feasible for the individual investors. i.e. you don’t need to have a huge capital to invest in each of the companies individually.
Investors who are looking to invest in the STI ETF have 2 options; the SPDR STI ETF and the Nikko AM STI ETF. The next section will introduce these 2 options, explore their differences and the reasons that lead to these differences.
SPDR STI ETF vs Nikko AM STI ETF
There are two STI ETFs listed in the SGX, namely the SPDR STI ETF (stock code: ES3) and the Nikko AM STI ETF (stock code: G3B).
The former was introduced in 2002 and managed by State Street Global Advisors, a leading U.S. ETF asset management company, and the latter was introduced in 2009 and Nikko Asset Management is a subsidiary of DBS.
Their investment objectives are similar, which is to replicate the performance of the STI as closely as possible, before expense costs. Below is an infographic that summarises the differences between these 2 STI ETFs.
Do note that the STI ETFs mentioned above are funds managed by various independent companies.
Although their aim is to replicate the STI as closely as possible, they are still exposed to various conditions that could lead to tracking errors. In summary, here are 4 reasons for possible tracking errors in the STI ETFs:
1. Challenges in owning constituent stocks immediately upon changes in STI: this is due to the large size of the ETFs. Any changes in constituent stocks would results in large buy and sell orders that may not be fulfilled easily.
2. Transaction Costs: Buying and selling of stocks would incur transaction costs which can eat into the returns of the ETFs. These costs are not present in the actual STI.
3. Dividends: Dividends collected will be used to pay off expenses such as taxes, management fees and trustee fees before they are redistributed to ETF investors. This will lessen the amount of dividend collected by each investor.
4. Bid and Ask Spread: Instead of being quoted based on NAV as per other funds, the STI ETFs are quoted with Bid and Ask spreads as they are traded like stocks on the SGX. This means that the prices investors get would be affected by the market demands, hence the price that you pay may vary from the actual price of the STI.
What is the degree of tracking error?
The degree of tracking error is acceptable for both STI ETFs. SPDR STI ETF has stated in their factsheet that their annual tracking error is 0.0846% while Nikko AM STI ETF has an annual tracking error of 0.21% (based on 12 July 2017).
Nikko AM has fared slightly worse in terms of tracking error but it might be due to her short history. In the short run, tracking error is expected to be higher and this error will revert to the mean over a longer period of time.
Hence, given more years of existence, the SPDR STI ETF has a smaller tracking error. At this point in time, we cannot determine if the employment of futures contracts by SPDR to minimise tracking error is indeed a better strategy.
We need to give Nikko AM STI ETF more years to stabilise their tracking error.
Does the STI ETF give dividends?
Many people have queried whether STI ETF pays out dividends.
The answer is YES! And yes to both SPDR and Nikko AM STI ETFs.
We explore this question in the following video:
Alex gives you a quick overview about STI ETF dividends in this video.
However, there are a few features you should understand about the dividend payout by the STI ETFs:
Dividends From Stocks are not Paid Immediately to Investors
Both SPDR and Nikko AM STI ETFs hold their assets with Trustees. This includes the dividends paid out to the Funds by the individual stocks under the Funds’ holdings.
These dividends are withheld until the distribution dates.
The dividends are deposited in cash, into investors’ designated bank account linked to the Central Depository (CDP). The mode of receiving the dividends is similar to other stocks listed on SGX.
Dividend Distribution Frequency
Nikko AM STI ETF – Pays out dividends semi-annually, around May and October each year.
SPDR STI ETF – Pays out dividends semi-annually, around Feb and Aug each year.
Fund Expenses are Deducted from Dividends
The Funds will take their fees from the dividends before distributing to the ETF investors.
Hence, the dividends received by investors are lesser than the dividends received directly from the companies. As the Funds’ expenses are low, the dividends are more than enough to cover the fees and the excess will be distributed to investors.
However, it is stated in both Funds’ prospectuses that in the event the dividends are not sufficient to cover costs, the Managers may sell some units or make short term loans to top up the difference.
Dividends Contribute to 30% of STI ETFs’ Past Returns
Although the dividends are lesser after the deduction of fees and taxes, dividends still contribute more than 30% of STI ETFs’ total returns.
Let’s look at the 10-year return of SPDR STI ETF vs the Index (I excluded Nikko AM STI ETF because it only has 6 years of history). Annualised Returns for the period of 1 Jul 2005 to 30 Jun 2015,
- SPDR STI ETF (Without dividends) = 4.11%
- SPDR STI ETF (With dividends reinvested) = 7.37%
Hence, dividends have increased the Fund’s returns by 3.26% per year, accounted for about 44% of the overall STI ETF Returns!
Who Should Invest In STI ETF?
Now that we understand how the STI ETF work, the next question to ask is “Should I be investing in the STI ETF?”
We think that people who fall into the following categories would find the STI ETF a convenient way to invest:
You Have Small Investment Capital
With a small capital, you can still invest in 30 stocks. This would provide sufficient diversification for your investments, should any particular stock or industry underperform, the overall STI ETF would not be greatly affected.
But if you invest in individual stocks, a small investment capital of say $1,000, could only invest into one stock. Investing in one ETF that owns 30 stocks is a safer approach than putting all that money into one stock.
You Do Not Know How To Pick Stocks
There have been sufficient literature and statistics to show that most investors, including the fund managers, are not able to beat the index by picking stocks. Since even the professionals who do it full time are having difficulties to beat the index, the chance of a part time investor beating the market should be even lower.
Hence, why not just invest in the index and you do not need to fret trying to beat it? There is a saying, “if you can’t beat them, join them!” You could have save a lot of trouble and money by avoiding individual stocks altogether.
You Are Lazy To Pick Stocks
Picking stocks require time and effort. Not everyone enjoys pouring through annual reports and catching up on developments of the companies they are interested to invest in.
There is nothing wrong with that and I know some investors openly declare their disinterest. In this case, ETFs are often the best instruments for them. They could park their money in index ETFs and grow their money over the long run while they enjoy other activities that life has to offer.
You Want To Beat CPF Ordinary Account Interest Over The Long Run
At the time of writing, CPF OA was offering 3.5% interest per year. *The 10-year returns from SPDR STI ETF is 2.07% (as of 12 July 2017)
If you have excess capital in CPF OA, and you do not mind taking more risks investing in stocks, you can consider utilising CPF OA monies to invest in STI ETF.
This ETF is approved by CPF board for members to invest their CPF in. It is important to note that it is more likely for the STI ETF to beat CPF OA’s interest in the long run (more than 5 years), but in the short run no one can accurately predict the stock market, and you may have paper losses on STI ETF.
That said, you must have the ability to tolerate such losses and stay invested for the long run instead of selling in panic.
*Index performance does not reflect tracking error, charges and expenses associated with the Fund, or brokerage commissions associated with buying and selling exchange traded funds.
You Want To Invest In The Future Of Singapore
Investing in STI ETF is essentially investing in the future of Singapore.
It was an amazing growth story and today we have many established companies that have began expanding their influence in Asia and other parts of the world. I am proud to see the Singapore Brand being admired by our neighboring countries.
The world has generally believed that Asia is the next growth story and Singapore appears to be in a good position as a East-meets-West hub and should benefit from the rising affluence of Asians. If this is true and as demand for goods and services grow in Asia, I believe some of our homegrown companies would be able to capture parts of the growth and make profits for shareholders.
Should You Invest In Unit Trusts Or the STI ETF?
Let’s compare the cost structure between a typical unit trust and a typical ETF:
Let me explain the fees to you.
When you buy a unit trust, you will normally have to pay an upfront fee known as the sales charge, and it can go up to 5%. Of course you wouldn’t really need to cough out the fee in cash, as the company will just deduct the amount from your investment.
If you put in $20k and the sales charge is 1%, your actual invested amount will be $19,800 instead of $20k.
For ETFs, the sales charge is essentially the brokerage fee which you incur when you buy or sell stocks. The market rate is 0.28% with a minimum of $25. There is an ongoing management fee that you need to pay for both unit trusts and ETFs.
However, the former is much higher than the latter, usually by a few times. The fee for an actively managed unit trust is around 1.5% per year while an ETF like the Straits Times Index ETF is at 0.3% per year. This means the unit trust is 5 times more expensive than the ETF.
Talk about compounding costs, this will erode a sizeable profits over the long run. All collective investment schemes should have separate trust accounts to hold clients’ money apart from the company’s funds. As such, the Trustees who custodise clients’ money must also be paid for the service.
This is usually a small amount but nonetheless a cost. The custodian fees are similar between unit trust and ETF. The switching fee may be incurred when you switch between unit trusts. This fee may not be incurred by some companies. For ETFs, take it as you sell one ETF to buy another. Either way you incur the normal brokerage charges of 0.28%.
Let’s say you would want to sell your unit trusts, some companies charge you a redemption fee that can be as high as 5%. Some do not charge this fee so you must be very clear before you commit to any investments. For ETFs, selling means incurring brokerage fee of 0.28%. To summarize, the ETF definitely beat unit trusts in terms of costs.
Are Unit Trusts Worth the Extra Costs?
The next question is to ask is that since unit trusts are expensive, are they worth the money? Can they deliver higher returns?
In the U.S. where financial data is very well collected, we have enough evidence that most unit trusts (or mutual funds as U.S. calls them) under-perform the benchmark they are trying to beat. You can go on to read the works of John Bogle and Burton Malkiel.
I did a short study on the 10-year performance of the Unit Trusts that invest in Singapore, versus the STI ETF, as at 31 Dec 2016, and the results are as follow (performance excluding costs, data from Fundsupermart):
- Aberdeen Singapore Equity Fund: 3.5%
- STI ETF: 2.66%
- Schroder Singapore Trust: 2.58%
- Amundi Spore Dividend Growth: 2.23%
- Nikko AM HIF Spore Div Equity: 1.91%
- Nikko AM Shenton Thrift: 1.77%
- Deutsche Singapore Equity: 1.72%
- United Singapore Growth: 0.71%
- LionGlobal Singapore Trust: 0.6%
NOTE: the above returns exclude sales charge and brokerage commissions
STI ETF beat 7 unit trusts based on a 10-year performance.
And the difference between STI ETF and the top fund is only 0.2%.
If I were you, I would not bet my dollar on which fund will beat the STI ETF in the next 10 years because you and I both have a high degree of getting it wrong!
Risks of STI ETF
Investments are not without risks, this includes the STI ETF. The following spells out the risks, which may not be an exhaustive list.
Country Concentration Risk
The STI ETF only invests in Singapore listed stocks and hence it is highly sensitive to changes to Singapore’s economic or political conditions. These stocks may also lack behind stocks listed in other countries should Singapore become a less worthy investment to pursue by investors.
The price of STI ETF would swing as much as other stocks. The degree of volatility can be extremely high during a stock market crash and an investor must be willing to accept the potential price swings that come with the investment in STI ETF.
This has been discussed in the early part of this article. In general, the STI ETF may not be able to track the Index closely, and deviates in terms of the returns to investors.
The STI ETF, if unpopular, may face thin volume and becomes harder for investors to buy or sell the units. Market makers, which are financial institutions, should create liquidity for STI ETF.
But in the absence of these market makers and low interest from retail investors, the STI ETF may become illiquid and the buy and sell price spread may expand, and deviate greatly from the Net Asset Value of the Fund.
An ETF still requires fund management, even though there is no active decision making on security selection or asset allocation. The risk is that the fund management is fraudulent or has high degree of negligence that the Fund fails to achieve its objective that it set out in the first place.
Is It A Good Time To Buy STI ETF?
Some investors want to gauge whether the STI is overvalued or undervalued by the Index PE Ratio.
An accepted fair value of an index is when PE is about 15. Any higher suggests that the market is overvalued and some investors prefer not to invest in the STI ETF or to avoid stocks in general.
While this is a way to incorporate some market timing for entry or even exits in the stock market, it is not an accurate indication. It should be used as a reference, in combination with other considerations, but should never be used as a single hard rule to buy or sell stocks.
To find out the STI ETF PE Ratio, you can refer to the SPDR STI ETF website. At the time of writing (updated 8 Jun 2017), the SPDR STI ETF PE Ratio was 13.13. The Nikko AM STI ETF does not publish their PE Ratio but it should be very similar to SPDR STI ETF.
You can save and access this entire STI ETF Comprehensive guide anytime, anywhere. Even offline.
How to Invest in the STI ETF?
Any brokers that is a trading member of SGX will be able to deliver the STI ETF units into your Central Depository (CDP) account. The market rate for brokerage commission in Singapore is 0.28% with a minimum of S$25, excluding SGX fees and GST. Including the fees and GST would usually end up about S$28. You must invest in full lot sizes and one lot is equivalent to 100 units.
The prevailing price of STI ETF is about $3.28 at the time of writing (updated 6 Jun 2017) and it would mean one lot would cost $305. However, it may not be worthwhile to invest a small amount of money via the brokerages as your percentage cost may be too high.
For example, if you buy one lot of STI ETF worth S$320, you would still have to pay S$28 commission, which is almost 9% sales charge!
This is too expensive.
The alternative is to start a monthly investment plan which we will discuss in the next section below.
Using CPF To Invest In STI ETF
You can also use your CPF Ordinary Account to invest in STI ETF.
It is one of the four approved ETFs that can be invested under the CPF Investment Scheme (CPFIS). To do so, you need to apply a CPFIS scheme account with one of the local banks and link it up with your brokerage account.
The process of buying the STI ETF using CPF monies is the same as you would do with cash, just need to indicate on your brokerage platform that you are using CPF to pay for the shares.
For CPF Ordinary Account, you can invest all the amount after the first S$20,000 into STI ETF.
Of course, you have to understand that the STI ETF may drop in value due to price fluctuations.
Hence, you must be willing to accept large drawdowns before deciding to invest in STI ETF.
Monthly Investment Plans for STI ETF
Instead of guessing whether the stock market is overvalued or undervalued, which most investors get it wrong all the time, you can choose to dollar cost average the STI ETF. This means that you set aside a fixed sum of investment capital, as little as $100 per month, you can invest in STI ETF gradually.
This is especially useful for people fresh out from school and do not have enough capital to begin investing. When STI ETF prices drops you buy more of it, and buy less of it when it gets expensive. Overtime you would collect enough shares to make your returns meaningful.
The table below would bring you through the comparisons of 4 companies that provide this monthly investment plan for STI ETF.
|Features||POEMS||OCBC||POSB||Maybank Kim Eng|
|Minimum Investment Per Month||S$100||S$100||S$100||S$100|
|Available STI ETF||SPDR STI ETF (ES3)||Nikko AM STI ETF (G3B)||Nikko AM STI ETF (G3B)||SPDR STI ETF (ES3) and Nikko AM STI ETF (G3B)|
|Buying Fees||< 2 counters $6|
≥ 3 counters $10
|0.3% or |
$5 per counter, whichever higher
|1%||1% for amount less than S$1,000|
1% charge (cap at $50)
|Credit to OCBC bank account||Credit to POSB bank account||Credited to bank account|
|Selling Fees||Normal brokerage fee applies (0.28% to 0.5%)||0.3% or |
$5 per counter, whichever higher
|No sales charge||Normal brokerage fee applies (0.275% to 0.5%)|
Let me bring you through the comparisons among these monthly investment plans.
Minimum Investment Per Month
All four companies offer the same minimum investment of S$100 per month.
Underlying STI ETF
POEMS only offers SPDR STI ETF while OCBC and POSB offer Nikko AM STI ETF. Maybank Kim Eng offers both SPDR and Nikko AM STI ETF.
POEMS charges minimum of $6 and it becomes hefty in percentage terms in you only invest S$100 per month. The charge will be 6% high! But if you invest above $6 you would enjoy economies of scale and lower your percentage cost.
OCBC is not by far cheaper at minimum of $5. And as you surpass this minimum cost with a larger investment per month, your cost can only go as low as 0.3%.
POSB charges a flat 1% regardless of investment amount and this would be the best option for a small investor.
Similarly, Maybank Kim Eng charges a flat 1%, but only for amount less than S$1,000 per month.
STI ETF historically pays out about 3% dividends per year.
POEMS is the only company that automatically reinvest the dividends into STI ETF in the following month. You have learned about compounding effect is important to attain wealth. Reinvesting dividends is one of those ways to take advantage of this effect. When you start a monthly investment plan, you aim to do it for at least 5 years.
Yes, POEMS is relatively more expensive but the compounding effect will dwarf the costs over the years.
OCBC, POSB and Maybank Kim Eng do not reinvest the dividends but distribute cash to your designated bank account.
POEMS, POSB, OCBC and Maybank Kim Eng allow you to redeem and sell part of your STI ETF holding.
You need to refer to procedures prescribed by the companies as they differ. Instead of selling the units for cash, you should be able to transfer the units to your CDP account*.
In terms of selling fees, POSB came out on top as it charges no fees.
POEMS and Maybank Kim Eng, as stock brokerage firms, would charge the prevailing brokerage fees. As you would have accumulate substantial number of shares over the years, you should be able to avoid the minimum fees.
As such, the brokerage fee of 0.28% would be slightly cheaper than OCBC’s 0.3% selling charge.
*Note: These monthly investment plans are all custodised accounts. This means that POEMS, OCBC, POSB and Maybank Kim Eng will hold the shares under their companies, and not in your CDP account. You need to pay an additional fee to transfer the shares to your CDP account.
Let me make it easy for you to decide. If you want to invest less than $600 per month, go for POSB. If you want to invest more than $600 per month, go for POEMS.
FAQ: Are there any benefits if we invest ourselves manually consistently every month without going through monthly investment plans?
Investing consistently requires a lot of discipline and emotion control. You have to remember to put in the investment every month, battle against uncertainty when you look at the market movements and may have to deal with situations where you find yourself weighing the importance of investing vs spending.
It is way easier to set up an automatic system to invest monthly.
You can save and access this entire STI ETF Comprehensive guide anytime, anywhere. Even offline.
Should You Do Dollar Cost Averaging Or Lump Sum Investing?
I get this question once in a while about the best way to deploy one’s investment capital into the stock market, and especially for the purpose of long term investment in an index Exchange Traded Fund like STI ETF.
Should an investor invest in one lump sum? Or should the investor spread out the capital by investing a smaller amount on a monthly basis?
Financial advisors often touted the Dollar Cost Averaging (DCA) as a superior strategy to lump sum investment. The reason they usually give is that the same amount of capital can buy more shares or units when the prices declined. Overtime, the average purchase price would be lower.
Is this true?
This study done by Vanguard tell us that Lump Sum Investment (LSI) is better two-thirds of the time while DCA performed better merely one-third of the time. Sparing you from reading the whole paper, the gist of it is to tell you that
- Lump Sum Investment is better in a rising market
- Dollar Cost Averaging is better in a down trending market
Because historically market rises most of the time and collapse infrequently, LSI fared better than DCA.
The findings can be understood in an intuitive manner – think of these scenarios:
In a rising market where share prices are increasing,
- A lump sum investment will put all the capital at work immediately and reap the potential gains
- DCA would result in buying lesser shares at higher prices as market trends up
In a downtrending market where share prices are decreasing,
- A lump sum investment will attract the biggest lost while
- DCA would continue to buy more shares at cheaper prices as market declines
Hence, it boils down to whether you are bullish or bearish about the market.
But I will advise you not to rely on your intuition because most investors cannot accurately predict the market direction. As such, knowing this may not be helpful to investors at all.
The decision to do an LSI or DCA should not rely on the market direction, but the availability of capital.
If you are starting your career and have not much capital to begin with, one should do DCA. It is a disciplined way of building up investment capital.
If you have already accumulated a sizeable capital after years of employment, you should consider LSI, this should work better for you two-thirds of the time.
STI ETF Dollar Cost Averaging Model Performance
Details of this Model and POEMS Share Builder Plan:
- The test started from Jan 2008 and we will continue to update the results on a monthly basis.
- Invest S$500 in STI ETF on a monthly basis (minimum S$100/mth)
- Phillip will buy as much shares as possible based on the investment amount (allows you to buy less than 1 lot)
- Purchase will be done on 18th of every month or the next market opening day
- Commission cost of S$7
- Shares are custodised by Phillip and not in your CDP account
- Dividends are automatically reinvested in the following month
- Phillip tax dividends at 1%
Below is the Google spreadsheet tracking the STI ETF SBP Performance.
Do You Want to Have a Higher Return Than STI ETF?
The 10-year returns from SPDR STI ETF is 2.07% (as at 12 July 2017). If you are happy with 7% and prefer a more passive approach, then investing in STI ETF would suit you.BUT… if you want a higher return (10%-15% annually), then you will need to learn how to pick your own stocks and manage your portfolio actively. We hold the Factor Based Investing Introductory Course where you’ll learn a strategy to sieve out stocks that bring greater average returns. Click here to find out more