ETFs are popular in Singapore. It is a way of accumulating wealth. But you have to know the essentials before putting a dam into it. This article will discuss the nature and types and how to invest in ETFs in Singapore. Getting the basics, you can better manage ETF investing skills and have a good chance of reaching your goals. To know more about how to start your investment in Singapore, click here.
What are ETFs, and how does an ETF work?
The features of ETFs:
- A package of securities: The full name for an ETF is “Exchange-traded Fund.” It collects all specified securities and issues units to investors.
- It invests based on the components of an index: A SPDR STI fund manager invests in the thirty companies from the index. Similarly, an S&P500 index fund invests in the five hundred companies from the index.
- A passively managed investment fund: The fund manager acts to do two critical things:
- He invests only in the companies or bonds or commodities from an index and no more.
- He rebalances the investment proportions specified if any changes occur due to deletions or proportional changes from the index.
- Investors buy into the shares of an ETF, not the shares or bonds, or commodities directly: Apart from a conventional shareholder, an exchange-traded fund investor is a shareowner investing a small part of all the stocks and bonds in a fund pool.
Why are People investing in ETFs?
You may realize there are many benefits in investing in ETFs, here are some:
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Reducing risks
When you buy into an ETF, you invest in part of a pool of securities from indexes like the Strait Times or Standard & Poor’s index. You hold a span of shares instead of one and may avoid the risk of losing all your investments due to one stock loss.
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Lower costs
The costs of ETF investing are lower than other mutual fund investing. It is a passively managed fund, and an ETF fund manager has no mandate to perform better than the index or market. The general theory is very few people can win over the market for a long time. So ETFs are the best low-cost and mid-to-long-term investing strategy. The average annual fund fees are 0.3-0.5%.
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Liquid investments
An ETF is an asset listed on a stock exchange. Update quotes are always available for investors looking for the best buys or sales. The prices are transparent and reflective of the most updated market changes. The ETF liquidity makes it more popular among investors.
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Capital gains and dividend income:
Same as stock and bond investments, a stock or bond ETF can rise and fall in prices. It may distribute dividends or income to ETF holders if the portfolio companies do so.
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Hands-off investing
ETF investors may not be willing to spend time investing; ETFs are a suitable conduit for hassle-free investing for busy investors to accumulate their wealth in a low-cost way.
Five popular ETFs in Singapore
| ETFs | Expense ratios | Details |
| SPDR STI ETF(SGX: ES3) | 0.3% |
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| ABF Singapore Bond Index Fund(SGX: A35) | 0.25% |
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| Philip Sing Income ETF(SGX: OVQ) | 0.7% |
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| SPDR S&P 500 ETF(SGX: S27) | 0.0945% |
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| SPDR Gold Shares ETF(SGX: O87) | 0.4% |
|
Costs of investing in ETFs
Three kinds of expenses will likely incur when you are going to buy an ETF:
1. An expense ratio
It is an annual management fee collected by a fund manager. As it is a passive investing fund, the expense is low compared to an active managing fund. It usually ranges below 1%.
2. A brokerage commission
A broker collects fees from the transactions of buying and selling a fund.
3. A bid/offer spread
You may pay a price difference to buy (offer) from or sell (bid) to an ETF.
4. Other management fees
Investors should carefully look at the prospectus or further details for probable costs before investing.
How to start investing in ETFs?
You have three ways to start investing in ETFs today.
1. To open a brokerage account.
A brokerage account is a quick and convenient way to invest in ETFs on the Singapore stock exchange. Updated information and price quotes are available during trading hours. Lastly, pricing is the last you should take care of. Brokerages in Singapore offer ETF investing services.
2. Regular Savings Plan(RSP)
Beginner investors can learn the investing basics through regular investing in ETFs. People planning to invest in a part of their salaries can use the dollar cost of the average technique to enhance return.
You can open an RSP with banks, e.g., DBS, POSB, or online investment platforms, such as Fundsupermart, DollarDEX, in a few steps and invest.
3. Robo-investing service
If you do not have much time to invest, you can try a Robo-advisory service. An artificial-intelligence-driven investing system chooses and manages clients’ portfolios. The advantage is that investors can access the low-cost automated investment management services previously reserved for high-net-worth clients. Most banks are now offering the service. Click here to read more on Robo-Investing in Singapore and find out how to choose the right one.
What are the risks of investing in ETFs?
ETF investing involves risks. You should regularly review your investment objectives with your financial advisor before including them in your investment portfolio.
The following are the main risks about ETF investing:
1. Currency risk
If you invest in foreign markets, such as the US, you may encounter fluctuations in currency exchanges from the Singapore and US currencies. The stakes are high in times of market turmoil. You may have to bear the risks of loss.
2. Default risk
Some ETFs may lend securities in the portfolio in return for compensation to enhance the fund’s return. It may involve default risk if a borrower does not return securities or has difficulties returning the shares. Fund investors are likely to suffer the loss.
3. Pricing risk
Listed on stock exchanges, the prices of an ETF may change due to market demand and supply. Investors suffer losses due to the price falls and benefit from price rises.
4. Liquidity risk
Like other securities on the market, market makers on the exchange provide liquidity for investors. If a sudden mood change in the market causes a temporary halt to an ETF share, investors may find it difficult to buy or sell it.
5. Tracking errors
One of ETF fund managers’ jobs is to match the return in line with the index. The tracking error may result from wrong strategies used by a fund manager, sudden market changes, or third-party defaults. Investors may not have matched the returns with an index’s one followed.
6. Fund size risk
A small ETF may have more liquidity risks than a bigger one. A small ETF fund manager may be forced to sell major stakes in the portfolio if many investors request redemptions. The liquidity of the fund may dry up, and the fund price may go south steeply.
Other Things You Need to Know
1. How do Synthetic ETFs work?
- To ensure the return and fewer fluctuations, fund managers pay a third party, usually an investment bank, for promises of market access and liquidity problems from emerging markets of developing countries.
- An investment bank promises to pay for any loss due to issues.
- These hedges include, but not the least, swaps and other derivatives.
However, the adverse side is that cost increases, and the risks may not completely disappear.
2. How many types of ETFs are there?
An ETF, like a stock, can be listed in many stock exchanges like New York Stock Exchange and the Singapore Stock Exchange. Many of them are index-tracking ETFs. Like many individual stocks, you can follow an ETF symbol in exchange to find out the news and performance of the fund.
You may notice two types of ETFs: Physical ETFs and Synthetic ETFs. They seek to track and replicate the returns from an index.
Physical ETFs
- The ETF is a straight product as it is a cash-based investment vehicle. The cash in the fund is the only source for investing.
- It charges limited management and transaction fees.
- The ETF has no counterparty risk as it only invests in the components from an index.
- It has a highly transparent mechanism and open operating procedures.
- An ETF holds securities and cash only.
Synthetic ETFs
- It uses derivatives to replicate the return in line with an index’s. Due to market transparency, access, liquidity, and timing issues, an ETF fund manager may use derivatives like swaps to keep pace with an index.
- Besides derivative costs, fund management collects transaction and management fees.
- It may have the counterparty default risk as a third party may not honor the pledge if changes occur in the market.
- As it involves complex transactions with other parties, the operating procedures are less transparent and open.
- An ETF may hold a proportion of derivatives apart from securities and cash. The risk from the combination may increase.
3. What are the asset classes of ETFs?
Since the launch of ETFs, fund houses have offered various ETFs on the market. They range from general to specific sectors. Investors have more options in choosing an ideal ETF. The following are the prominent and popular ETFs:
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Stock ETFs
They invest and track the companies from stock indexes like Dow Jones Industrial Index or the Strait times Index. Buyers of the index ETFs generally invest in a country’s economic growth. As the stocks from the index may fluctuate in prices, it is a high to very-risky investment class. The SPDR STI ETF(SGX: ES3) is a stock index ETF.
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Bond ETFs
The ETFs invest in securities from bond indexes like the iBoxx ABF Singapore Bond Index. Investors seek steady income streams from investments. Most of the investment-grade bond ETFs belong to a conservative asset class.
However, some bond ETFs like junk bond ETFs are risky investment classes as they invest in bonds below investment grades.
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Commodity ETFs
The funds invest in assets from physical to commodity companies and belong to highly risky classes. The SPDR Gold Shares ETF(SGX: O87) is a commodity ETF.
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Sector ETFs
They track industrial sectors like healthcare, technology, finance, or consumer products like a Japan REIT ETF. The most followed indexes include Nasdaq Bank Index; Dow Jones Transport Average.
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Country specifics ETFs
The funds focus on major indexes of a country’s stock market like the Strait Times Index, Dow Jones Industrials Average, or Hang Seng China-Affiliate Corporation Index.
Final Thoughts
Investors may benefit from asset diversification, reduced costs, and international exposure through ETF investing. However, fund size, tracking performance, currency risk, and third-party default risk may cause loss to ETF investors. It is suitable for passive and long-term investors to grow their wealth.
Three key takeaways
1. ETF investing reduces risks by diversifying assets.
2. ETF investors have low-cost benefits.
3. It is suitable for long-term, hands-off, and regular investors.
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