How to invest in ETFs

WHAT IS AN ETF AND WHAT DOES IT DO?

An exchange traded fund (ETF) is a fund traded on a stock exchange, which seeks to copy a specific market index such as Singapore’s Straits Times Index. And there are ETFs for different asset classes – the most popular being stocks, bonds and commodities.

Because an ETF essentially seeks to copy a particular index, investor returns should be close to that for the chosen market index it follows. But it does not necessarily mean an ETF’s returns will be exactly the same as that of the underlying index. There is something called “tracking error”. To closely replicate the performances of underlying indices, these ETFs have to constantly adjust the number of shares held in specific stocks as stock prices fluctuate. Time lags between market price movements and the adjustments in the ETF’s stock holdings can cause differences between the ETF’s performance vis-à-vis the benchmark index’s performance.

WHY DO PEOPLE INVEST IN ETFS?

ETFs are useful investment instruments for new investors who want stock diversification from relatively small outlays. This is because buying into one ETF gives investors access to the performance of a larger portfolio of stocks or bonds. This reduces single stock/single bond concentration risk.

Also, they have lower costs. Management fees are lower because they are passively managed and do not employ fund managers for stock selection. They just buy the stocks to replicate the underlying index.

ETFs suit investors who are not trying to get better returns than the underlying index – that is, people who are happy with matching the index in returns performance.

WHERE DO YOU START?

You can invest in ETFs through either trading platforms (you’ll need a trading account) or regular savings plans (RSPs). For investments via trading platforms, you can invest in lump sums, whenever you wish. For RSPs such as POSB Invest-Saver, under which a fixed amount is invested every month via GIRO, you can start with as little as S$100 a month.

ADVANTAGES OF A REGULAR MONTHLY INVESTMENT IN ETFS

For starters, you don’t need substantial capital to start investing.

And it removes the difficult decision-making involved in market timing. Often novice investors delay getting started because they agonise over the timing of their investments. A RSP imposes a commitment to invest a certain amount every month. It works on the idea of averaging out the prices paid over time and relying on the idea that good stocks and bonds generally build value over time.

WHAT ETFS CAN I BUY IN SINGAPORE?

There is a range of ETFs traded on the Singapore Stock Exchange (SGX) offering investment access to diverse markets, from stocks to bonds to commodities. The range of geographies covered is very extensive, including Singapore, China, Japan, Europe and the United States.

Under the POSB Invest-Saver RSP, two SGX-traded ETFs offered at the time of writing this article are the Nikko AM Singapore STI and the ABF Singapore Bond Index Fund.

The Nikko AM STI ETF invests in companies that make up the Straits Times Index. The STI is an index of Singapore’s top 30 companies, including well-known blue-chip stocks such as the three local banks, Singtel, Keppel Corporation and CapitaLand.

Investors in the ABF Singapore Bond Index ETF are putting money into a range of bonds, mostly issued by the Singapore Government and quasi-Government bodies.

Another ETF offering investment in Singapore stocks is the SPDR Straits Times Index ETF.

INVESTING BEYOND SINGAPORE VIA ETFS

If you want to go beyond investing in Singapore, you can also invest in global markets through a range of other ETFs traded on the SGX.

As indicated above, the range is extensive, including (but not limited to) ASEAN, Japan, China, Europe, and US stock index ETFs. One popular example is an ETF which tracks the S&P 500 Index – the SPDR S&P 500. The S&P 500 is an American stock market index of the top 500 companies listed on the New York Stock Exchange or NASDAQ. The companies here include names such as Apple, Microsoft, Amazon, Facebook and Warren Buffett-led Berkshire Hathaway.

There are also commodities and gold ETFs.

AND IT ALL STARTS WITH AS LITTLE AS A FEW HUNDRED DOLLARS

As we have outlined above, you can start with S$100 a month under a RSP.

Your CPFIS funds can be used for four of the SGX-traded ETFs (SPDR Gold Shares, SPDR Straits Times Index ETF, Nikko AM Singapore STI ETF and ABF Singapore Bond Index Fund). And the Supplementary Retirement Scheme can be used to invest in all SGX-traded ETFs.

If buying directly on the SGX (rather than through a RSP), you can work out quickly how much you need to start by asking your bank or stockbroker the minimum “board lot” size. These ETFs most commonly trade in board lots of 10 and 100.

For example, the ABS Singapore Bond ETF trades in board lots of 100. At its price at time of writing of S$1.12, you need S$112 to begin. The Nikko AM STI ETF also trades in board lots of 100 units. And at its price of S$3.31 at time of writing, you need S$331 to begin.

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