All you need to know about using SRS and CPF to buy ETFs

Ever wondered if investing in ETFs is suitable for you and how you can use your SRS and CPF funds to invest in them? If that is you, you have come to the right place.

What are ETFs?

ETFs, or exchange traded funds, are a type of investment fund that is listed and traded on stock exchanges. They can be traded like stocks, and they offer diversification like a unit trust, as they are a collection of assets.

But there is one key difference: unlike most unit trusts, ETFs are designed to mimic the performance of a stock, bond or commodity index.

This is useful for those who want to invest in a type of market (e.g. Singapore stocks), compared to a particular stock (e.g. Company X).

That’s because investors cannot invest in indices directly. So, ETFs offer a close alternative, by attempting to replicate the returns of the index as closely as possible, as if the investor was invested in the index directly. So, if you wanted to invest in the Singapore stock market, you can do so by investing in an ETF that tracks the performance of the Singapore benchmark Straits Times index (STI).

Here’s how it works.

The STI is made up of 30 of the largest listed companies on the Singapore Exchange by market capitalisation. An ETF that tracks the STI, like the SDPR Straits Times Index ETF, tracks the index by owning assets in the same 30 stocks, in the same proportion as is seen in the STI.

When the component stocks’ prices go up, pushing up the index price, the ETF should follow closely behind.

We should take note that an ETF will never be able to track an index perfectly, that is known as a tracking error. Why so? If a particular component stock price changes too much, that would upset its weightage within the ETF, and in turn present a return that differs from the original index. As such, ETFs need to be rebalanced frequently to return it to the weightage within the original index.

How to buy ETFs?

Investors can purchase ETFs with cash, CPF, and SRS funds. However, there is a key difference between each mode of purchase.

• When you use cash to purchase ETFs, you are tying up your most liquid assets for something that you plan to hold for a longer term, when you could be leaving it for unexpected emergencies.
• When you use your CPF or SRS funds to purchase ETFs, you would be utilising funds that you would not need in the immediate future – since both are earmarked for your retirement.

There are also differences in the list of ETFs that you can purchase.

• With cash and SRS, you can choose from the full suite of SGX-listed ETFs.
• With CPF, you may purchase from a shorter list of government-selected ETFs. These include the SPDR Straits Times Index ETF and Nikko AM Singapore STI ETF which allows you to invest in the overall Singapore market, ABF Singapore Bond Index Fund which lets you invest in Singapore bonds, and SPDR Gold Shares which lets you invest in gold.

Why buy ETFs?

ETFs can offer a better return on investment compared with leaving your Central Provident Fund Ordinary Account (CPF-OA) and Supplementary Retirement Scheme (SRS) funds idle. As a reference, the funds in your CPF-OA earn interest of 2.5% each year, while your SRS funds earn an interest of just 0.05% per year.

If an investor had invested his funds in the SDPR STI ETF in December 2009 and withdrew his investment exactly 10 years later, he would have gained a return of 8.8% on his investment. What if he had invested in the SDPR Gold Shares ETF in the same period of time? He would have gained a return of nearly 25%. This is just the price appreciation over the period, before including dividend payouts.

That said, always remember that past performance is not a guarantee of future returns, and investment always has an element of risk.  

How to get started?

You will need to satisfy certain criteria before investing using your CPF-OA or SRS monies.

Once you tick off on the necessary checkboxes, you can start investing from the comfort of your own home.

If you opened your SRS account with DBS, simply link it to your DBS Vickers Online account, and you’re on your way.

Using DBS Vickers, you can also easily purchase other investment assets like shares, bonds REITs and warrants.

If you have decided to invest in ETFs to make the most of your retirement savings, get started here.

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Disclaimers and Important Notice
This article is meant for information only and should not be relied upon as financial advice. Before making any decision to buy, sell or hold any investment or insurance product, you should seek advice from a financial adviser regarding its suitability.

All investments come with risks and you can lose money on your investment. Invest only if you understand and can monitor your investment. Diversify your investments and avoid investing a large portion of your money in a single product issuer.

Any past performance, projection, forecast or simulation of results is not necessarily indicative of the future or likely performance of any investment.

Disclaimer for Investment and Life Insurance Products

Deposit Insurance Scheme
Singapore dollar deposits of non-bank depositors and monies and deposits denominated in Singapore dollars under the Supplementary Retirement Scheme are insured by the Singapore Deposit Insurance Corporation, for up to S$100,000 in aggregate per depositor per Scheme member by law. Monies and deposits denominated in Singapore dollars under the CPF Investment Scheme and CPF Retirement Sum Scheme are aggregated and separately insured up to S$100,000 for each depositor per Scheme member. Foreign currency deposits, dual currency investments, structured deposits and other investment products are not insured.