How to invest if you have $20k or more – Why we think The Straits Times is Wrong (Unit Trust vs ETF)

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We found the article titled How to invest if you have $20k or more, published on The Sunday Times (19 Jul 2015)rather disturbing. This post is to respond to the very biased responses from so-called experts in the financial industry, who supposedly have the best interests for you than their own pockets.

Who am I to respond to experts? Because I am a retail investor myself whom the experts are peddling these instruments to me. I am sure I am on the same side as you.

WITH $20,000 – 100 % Unit trusts. Seriously?

This was the conclusion from the article. If you have $20k, put EVERYTHING in Unit Trusts.

I agree with the point that with $20k, it is difficult to achieve diversification by buying the stocks directly. Hence, it is easier to invest in a fund to achieve the diversification and lower the risk.

But my point is, why is Unit Trusts the only consideration? Why not invest in cheaper index Exchange Traded Funds (ETFs)?

It just reinforced my opinion that Unit Trusts fund the Maserati’s and Ferrari’s for the financial industry.

Let’s compare the cost structure between a typical unit trust vs ETF:

Unit Trusts vs ETFs costs

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 28 Feb 2015, and the results are as follow (performance excluding costs, data from Fundsupermart):

  1. Aberdeen Singapore Equity Fund: 8.3%
  2. STI ETF: 8.1%
  3. Schroder Singapore Trust: 8.0%
  4. Amundi Spore Dividend Growth: 7.7%
  5. Deutsche Singapore Equity: 7.7%
  6. Nikko AM HIF Spore Div Equity: 7.2%
  7. LionGlobal Singapore Trust:6.2%
  8. Nikko AM  Shenton Thrift: 6.0% 
  9. United Singapore Growth: 5.9%

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!

So if you ask Dr Wealth, we would put our money in low-cost index ETFs, in particularly a mixture of STI ETF and ABF Singapore Bond Index ETF in the portfolio. Period.

This just reminds me of the parable from Where are the Customers’ Yachts?

“Once in the dead dead days beyond recall, an out-of-town visitor was being shown the wonders of the New York financial district. When the party arrived at the Battery, one of his guides indicated some handsome ships riding at the anchor. He said, “Look, those are the bankers’ and brokers’ yachts.” “Where are the customers’ yachts?” asked the naive visitor.” – Ancient story.

And if you haven’t had enough, go on to see Dilbert’s comics.

  • Thanks for sharing this.

    It sickens me to continue reading such “expert” peddling sales pitch which they package as advice. I can’t help but roll eyes whenever a FA tries to sell me ILP or UT.

    There are so many studies (Andrew Hallam, Tony Robbins) in the market that ETF is the way to go if you want to be a passive investors, and I reckon that accounts for more than 90% of the population.

    But a swanky advertisement will make many ignore conventional wisdom.

    Hard-earned money down the drain.

  • Hello Alvin,

    Here is an article that simulated several guru’s investment ideas and overlaid fee to examine its impact.
    A simple 1-2% fee can wipe out the returns quickly.
    http://www.ft.com/intl/cms/s/0/73ba77b2-c1dc-11e4-bd24-00144feab7de.html

    After Standard Chartered started their global trading account, I gained access to ETFs in UK, US and HK. Except for a few unit trust investments, I have move most of them into ETFs. Some markets could benefit from active investing and some indices are not replicated. I also avoid synthetic ETFs.

  • Hello Alvin,

    That post should be mandatory reading for all people who do not know where to put their money (yet).
    Always ask yourself what is the main objective of the person who recommends something to you. Is he/she really interested in you or only in your money?

    When analyzing past performances of unit trusts we must not forget the survivorship bias. In brief this is the logical error of concentrating on things that “survived” some process and ignoring those that did not because they are no longer visible.

    The so called fund ‘managers’ (what do they manage again?) do like to quietly close non-performing funds or merge them with successful ones giving all kinds of superficial reasons.

    One real reason is that by doing this those underperformers are no longer displayed for any long-term analysis.

    Clever people studied the unit trust historic perfomances for the U.S. market including those funds that did not survive and the result is that shockingly 96% of actively managed funds underperformed the market index after those fees you describe above and taxes.

    Good luck in finding those outperforming 4%. Not in hindsight (that would be easy), but right now and goign forward for the next years.

  • I agree with you STI ETF is a cheaper option. But to gain exposure to other markets such as China, you will have to do it via UT as ETF is not an option. Investing should also not be narrow minded looking just at STI. It should be across asset classes.

    • There are affordable ETFs that track the Shanghai Index if you are interested to invest in China, not necessarily need to use UT.

      There are bonds and commodities ETFs which give exposure to other asset classes too.

    • The bigger ETFs tracking the Chinese indices are listed in U.S. and two of them are

      iShares MSCI China ETF – 0.62% expense ratio
      SPDR S&P China ETF – 0.59% expense ratio

      Important to note they track different indices so understanding the composition, size and number of stocks in the index should be part of the considerations.

    • The rule of thumb is to have an allocation in stocks is equivalent to 100 minus your age. And the remaining percentage in bonds.

      For example, John is 40 years old, he will have 60% in stocks and 40% in bonds.

      • Hi Alvin, would like to have your opinion: with interest rates still being at lows, would the long term investor still be concerned by this factor and reduce the allocations to bonds accordingly?

        • Even though the interest rate is low and more likely to rise, it does not mean it is going to. The market likes to surprise us.

          Instead of guessing, one should build a portfolio against all possible scenarios. And a permanent portfolio is a good start.

  • @lin; you seem to be ill informed that there are no ETFs that doesn’t track the China market or any regional markets when there are.

  • I invest in a global bal fund. It give me even better return than STI ETF. And even better risk diversifiscation.

    I vest with 30K, to date it is worth some 59K. I think some 12%. I don’t mind the charges, so long it perform.

    petertan

  • Here are some well-known heavyweights that swore not to touch unit trust…
    1. Donald Trump, a billionaire.
    2. Jim Rogers, another billionaire who stays in Singapore.
    3. Rich Dad Poor Dad author Robert Tanaka Kiyosaki.
    4. The very famous Warren Buffet.
    5. The Millionaire Mindset author T Harv Eker.

    The list goes on but you get the idea. These people either told me they avoid unit trusts (T Harv Eker & Robert Kiyosaki) or i read it from their book(s).

  • FYI, for as little of $20k, one can simply sell US options far away and get 5-10% per mth. That’s far more worthwhile than what ST suggested.

  • This is a good post. Financial education at its best. Educating the masses on what to avoid, particularly when unit trusts are even recommended by mainstream media. The numbers speak for itself. It is a no-brainer to invest in a ETF that tracks the STI compared to unit trust given the guaranteed higher cost and probable out-performance of the ETF.

  • I have just retired and I have sold many of my shares to have a regular passive income for my old age, What would you suggest, One will be the Singapore Bond, and i would like to know if i should buy some shares with Nikko AM STI ETF and Some shares in STI ETF . What other Bond would you recommend?
    Thanks

    • Not sure if you are aware that STI ETFs are shares. So you would be back to square one if you sell shares and buy STI ETF.

      If safety is your concern, stick to high investment grade bonds backed by credible government like Singapore. So your Singapore Bond choice is a logical one.

      I’m sorry we cannot make any recommendation.

  • Hi Alvin,

    Thanks for the wonderful articles.

    I agreed that ETF is the way to go. However, in Singapore, the number of liquid ETF in SGD is really limited as compared to USA. What are your thoughts to mitigate currency risks (changing SGD to USD for investments) and the 30% withholding tax imposed on dividend?

    An additional cost in investing in overseas ETF is the platform fee imposed by bank or brokering house.. It is about 0.2% to 0.3% AUM yearly.

    Thanks in advance on your thoughts.

    • ETFs have market makers so low liquidity is not a major concern; ie, there are traders who hold inventories to buy and sell with clients.

      Generally I would not buy a local ETF that is listed overseas just because liquidity is better. For eg I would prefer to buy STI ETF listed on SGX than to buy the MSCI Singapore listed in the US. I would prefer to buy the S&P 500 ETF listed in the US than to buy the equivalent listed on SGX.

      I agree that the choice of ETFs is a lot wider in the US. It is definitely a consideration if you want to get exposure to various countries/regions/asset classes/themes/strategies. Withholding tax and custodian fees are part and parcel of that and we just keep it to a manageable level would be good enough.

      • Hi Alvin what are your thoughts on buying ETFs like S&P 500 at near or all time highs which I believe we’re currently seeing in 2018 right now? Of course on a long term basis, there should be newer highs moving forward but as value investors, is it not the time to wait for a correction or “crisis”? Of course, the opportunity cost is net dividend yields plus if the index posts new highs. But I’m weighing this against the 30% withholding tax and uncertainty of trade policies of the US, particularly with China. At current highs, it would appear there might be more downside rather than upside risk in the short term. If “wait” is the approach chosen, what short term investment might offer sufficient short term liquidity?

        • You can consider dollar cost averaging since you are not sure, but suspect, that the market is coming down. You can buy more shares as they go lower. And you wouldn’t feel missed out if it goes higher.

  • Hi Alvin. Thanks for your article. I have a question. Since this article was written in 2015 – what are your thoughts on robo advisory companies like smartly, auto wealth etc?

    • The roboadvisors are good alternatives if you really wish to outsource everything by paying some additional fees than if you have done the work yourself.

    • Using SGX has a comparison does not do justice to making the case given SG rather shallow market. Appeal of UT lies in accessing sectors or markets beyond SG across a variety of risk profiles. Ok not to cover but should at least flag and point folks to other resources as reference.

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