Investing in ETFs is one of the easiest and lowest-cost ways to start investing. ETFs were first introduced in the early 1990s, to help investors gain exposure to broad country indexes.
ETFs have gained in popularity, especially in recent years. Today, passive investing – such as through ETFs – has overtaken active investing. Now, there are also more than 7,600 ETFs listed globally (as of 2020).
The diversity or complexity of ETFs have also evolved, and it is no longer just about gaining exposure to broad country indexes. There are ETFs now for very specific business sectors, regions, asset class, as well as more complicated leveraged and synthetic ETFs.
What Are ETFs?
ETFs are listed on stock exchanges and seek to replicate the returns of an index. The index can be broad country-based indexes such as the Straits Times Index (STI), Hang Seng Index or S&P 500 Index. It can also track narrower indexes that are tracking specific business sectors, geographical regions or asset classes.
How To Invest In ETFs In Singapore?
As ETFs are listed on the stock exchange, the most common way to invest in ETFs is through a stock brokerage account – similar to how we buy and sell stocks in Singapore. According to the Singapore Exchange (SGX), there are 43 ETFs listed in Singapore.
As most stock brokerage accounts also offer us access to major stock markets globally, we can invest in ETFs listed in these markets. As mentioned earlier, there may be as many as over 7,600 ETFs listed globally that we can access.
Another way we can invest in ETFs in Singapore is through Regular Shares Savings (RSS) plans. There are currently 4 RSS plans in Singapore, some of them also allows us to invest in individual stocks in addition to ETFs.
A third way investors can gain exposure to ETFs is by investing via robo-advisory platforms in Singapore. There are currently at least 11 robo-advisory platforms in Singapore, and 9 of them offer their solutions using ETFs. Predominantly, the ETFs that robo-advisory platforms use are exposed to broad indexes listed in the U.S.
Benefits Of Investing In ETFs
There are four main benefits of investing in ETFs:
#1 Low Barrier Of Entry For New Investors
Investing in ETFs is the perfect way for new investors to get started as they do not need a lot of investment knowledge or skills to start investing. Investors also would not have to spend much time trying to monitor or rebalance their investments.
#2 Instant Diversification
Depending on the index that the ETF is tracking, we can technically build our entire portfolio with just a single investment in an ETF.
One example is if we invest in the S&P 500 ETF (SGX: S27). With just one S&P 500 ETF investment, our portfolio will comprise close to 500 blue chip stocks covering about 80% of the market capitalisation in the U.S. Furthermore, this investment will be diversified to the IT (26%), healthcare (13%), consumer discretionary (12%), Financial (12%), communications (11%), industrials (9%), consumer staples (6%) and more.
#3 Passive Approach To Investing
By investing in ETFs, we are taking the decision to pick stocks out of our hands. We are simple letting the index dictate which stocks we should be investing in.
If we invest in a broad country index, again, like the S&P 500, we will essentially earn the market returns of the U.S. market. This way, we do not try to beat the market – we only want to earn the market returns over the long term.
Another way we enjoy a passive approach to investing is that we do not have to monitor our investments so closely. This is because the index usually has a methodology for picking and removing constituents stocks. This means that once a stock does not fit into the methodology, it is automatically removed from the index, and by default the ETF. This is how a good ETF can last for a very long time, while individual stocks may not.
#4 Low-Cost Method To Invest
ETFs usually charge lower management fees compared to actively managed funds. This is because ETFs are simply following instructions on what to invest in by replicating the index. By not having an active fund manager stock picking or timing stock prices, we are able to save on the cost.
For example, the S&P 500 ETF has a net expense ratio of 0.0945%. The STI ETF has a total expense ratio of 0.3%. Typically, the larger the ETF, the lower it can afford to charge for its expense ratio.
Downsides Of Investing In ETFs
Similarly, there are four main disadvantages to investing in ETFs.
#1 ETFs Always Underperform The Index
When we buy (or sell) an ETF, we have to pay brokerage fees. When we hold an ETF, we have to pay management fees and other expenses. For these reasons, we will never earn the return that the index delivers, but we will earn a lower return that is close to it.
#2 Will Never Pick Up On Good Stocks To Invest In
Remember, the ETF is simply following instructions on what to buy from the index. Unlike active fund management, where there’s an active fund manager speaking to companies and keeping their ears on the ground in order to earn better returns and pick up on growth trends earlier.
#3 False Sense Of Security For Investors
By investing in an ETF, even one as broad and diversified as the S&P 500 ETF, we may falsely think that our investments are safe. To be clear – every investment carries risk.
Case in point, during the market crash in February to March 2020, the S&P 500 declined 32% in a space of approximately one month. This shows that ETFs can still fluctuate wildly, especially when there is a market-wide crash.
What we are sheltered from is the risk of an individual stock performing poorly within the ETF.
#4 No Control Over Investing Or Divesting
We’ve covered this point a few time – the ETF has to replicate the index. This means that if the index removes a stock that we really like, the ETF will just sell that stock. If the index adds a stock we absolutely do not want to touch, the ETF will still purchase that stock.
Best ETFs In Singapore To Invest In
There’s really no right or wrong answer as to which ETFs are the best to invest in. One possible answer is sticking to investing in ETFs that are exposed to broad country indexes.
In Singapore, we can invest in these five popular ETFs listed locally:
#1 SPDR STI ETF (SGX: ES3) / NikkoAM Singapore STI ETF (SGX; G3B)
The SPDR STI ETF and NikkoAM Singapore STI ETFs are both seeking to replicate Singapore’s 30-stocks Straits Times Index (STI).
#2 ABF Singapore Bond ETF (SGX: A35)
The ABF Singapore Bond ETF invests in SGD-denominated bonds issued by the Singapore government and quasi-government entities.
#3 GLD US$ ETF (SGX: O87)
The objective of the GLD US$ ETF is to reflect the performance of the price of gold bullion, less expenses.
#4 NikkoAM-Straits Trading Asia Ex Japan REIT ETF (SGX: CFA)
REITs is a hugely popular asset class in Singapore, and there are three REIT ETFs listed in Singapore. The NikkoAM-Straits Trading Asia Ex Japan REIT ETF is exposed to Singapore (60%), Hong Kong (23%), China (8%), Malaysia (5%), Indonesia (2%) and others (2%).
#5 Lion-OCBC Sec Hang Seng TECH ETF (SGX: HST)
The Lion-OCBC Sec Hang Seng Tech ETF will comprise 30 of the largest technology stocks listed on the Hong Kong Stock Exchange. It includes popular stocks such as Alibaba, Tencent, Meituan, Xiaomi, JD.com, Lenovo, Ping An, ZTE, Foxconn and others.
Don’t Take A 50-50 Chance With A So-So Trading Experience
As a Gold/Diamond client with FSMOne.com, you can let your investments soar higher with flat HK$50 processing fees* for HKEX trades.
This means that whether you make a HK$10,000 or HK$100,000trade, you will only be paying HK$50 in processing fees*. So, the higher your investment amount, the higher your cost savings!
Click here to find out more.
*Excludes exchange-related fees.