Tuesday, April 29, 2008

STI Exchange Traded Fund

streetTRACKS introduced Straits Times Index Exchange Traded Fund (STI ETF) into Singapore market on 17 April 2002. It is the first locally-created index fund to be listed on the SGX. The purpose of this fund is to give shareholders investment returns as close as possible to the performance of ST index. Therefore you can expect the same STI stocks to make up all the holdings of the fund if you see the fund fact sheet.

STI ETF combines the advantages of buying shares and unit trusts. You can buy STI ETF in 1000 shares just like any other shares and the share price is approximately 1/1000th of the ST index. In short, STI ETF is an index fund that can be traded anytime when market is open.

Investors who wish to diversify their investment through a fund and at the same time have exposure to Singapore blue chip stocks like Keppel Corp, DBS, Singapore Telecom, etc may find STI ETF a good investment vehicle to consider. The index fund is managed by State Street Global Advisors Singapore Limited.

As much as possible, investors will try to keep their investment costs low so that fees and charges do not eat into their returns. Another good point about STI ETF is that the expense ratio of this fund is only 0.3% per annum, very low compared to other equity unit trusts.

Buying and selling fees depend on the rate that you enjoy with your trading account. If your trading fee is at 0.28%, thus a buy and sell will cost 0.56% of invested capital which is much cheaper than paying a one time sales charge of 1.5% for other equity unit trusts.

However investment through STI ETF is not without its drawbacks. The picture below shows the price chart of a STI ETF together with its trading volume. A point worth noting is the liquidity of its shares. You can see that trading volume is very low on certain days and can be as low as 30k on some days. As trading volume is very low, you may find it difficult to buy and sell the shares. It is worse if you can’t sell your shares when you need to.

STI ETF chart

Another disadvantage is that STI ETF may not be suitable for a small time investor. For example an investor who wishes to do Dollar Cost Averaging (DCA) of about $1000 a month may find his brokerage fees a bit expensive due to the minimum trading fees imposed on him. He may choose to invest in unit trusts instead if he wants to DCA with small capital.

I have given a short introduction on STI ETF and discussed its pros and cons in this article. So I hope investors can have a better understanding before choosing STI ETF as their investment vehicle towards financial freedom. Its liquidity issue is something that investors should seriously consider especially if it forms part of your future retirement plan.


James said...

Hi Mike,

I am thinking of terminating 2 poor-performing ILPs which I had bought for my daughters’ future education and using the money to buy an ETF via the PSBP. After cashing out the policies, I will have about $13.5k and will also be able to set aside $300 per month for the PSBP. I intend to hold on to my investment for 10-15 years.

I am considering between STI ETF and DBS STI ETF.

Based on my situation, which would be a better choice - STI ETF or DBS STI ETF? Or should I consider unit trusts instead?

If I should consider unit trusts, do you know of any which mirrors the STI?

I cannot buy DBS STI ETF using the PSBP, correct?

And the million-dollar question :) is this a good time to buy?

Would greatly appreciate your advice, Mike. Thanks.

Mike Dirnt said...

Hi James,

I believe you bought the ILP whose daughter is the life to be insured? if it is, be sure to get some protection ie $10 or 20k term insurance. you dont really need big protection as you are not depending on your daughter yet.

I just checked poems, there isnt a DBS one. If you are going for PSBP, then STI ETF is good enough. Try to increase the monthly contribution to $500. $300 may be too little for the fixed costs involved.

With $500 a month, phillip will buy for you some shares and its good to accumulate on a regular basis. Such a way, you dont have to worry about buying at a high or low. ie you buy less units when the price is higher, and vice versa. So there is no reason to worry about whether this is a good time to invest in STI. Your $13.5k is good to last for more than 2 years of contribution. Lets say, if market has gone very high after 2 years, you can choose to stop the contribution or if market has gone into another bear cycle, i hope you can still continue to take advantage of the lower prices. 10 to 15 years is a good long term period. And you are rest assured (my opinion would say 90%) to achieve a return that reflects the singapore economy. so if you are confident of our country, go ahead and buy into STI ETF.

most important of all, the fees are definitely cheaper with STI ETF than going through the ILP way.