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Passive Investment Strategy For ETFs in Singapore


We discuss how you can invest passively in Singapore ETFs using an asset allocation strategy.

We previously introduced passive investing and the advantages that come with it. In this article, we will look at Exchange-traded fund (ETF), which we believe is a good platform for retail investors seeking for a passive approach towards investing.

The Investing Landscape in Singapore

While the avenues for active investing are numerous (you can read more in this article), the same cannot be said for passive investing. In Singapore, there is no financial services company that deals solely with investments in passive funds. This is in contrast with more developed investment communities in the US, where companies such as Vanguard provides a large selection of bond and equity funds that track the market index. These companies pride themselves on giving their customers a wide range of products at low fees. In Singapore, we do not have the economies of scale to justify the low fee-based services. As such, our choices are limited.

Exchange-traded fund (ETF)

We will be discussing in details on ETF today and the strategy to start investing in it. But first, we recommend you read these articles on Introduction to Bonds, Portfolio Rebalancing and Asset Allocation.

After deciding that you would want to invest passively, how should you go about doing it? Let us run through the investment process using an example.

John aged 25, has $30,000 and he wants to invest his money passively. He needs to first consider the asset allocation. One method would be to allocate 75% in stocks and 25% in bonds. If you are unsure on this, please refer to the ‘Asset Allocation’ link above. (Do note that asset allocation is a subjective topic by itself, and our “75-25” is not a fixed rule.)

In the stock segment, he can purchase the Straits Times Index (Ticker: ES3) and in the bond segment, he can purchase the ABF SG Bond ETF (Ticker: A35). The ABF SG Bond ETF aims to track the returns (denominated in S$) of debt instruments issued by Singapore Statutory Boards.

John can purchase the ETFs using his brokerage account, similar to purchasing shares. Remember that ETFs trade like shares and the individual will incur brokerage charges, depending on which financial institution he uses. For a total value of  $29,680, he would have incurred a total brokerage charge of $81.62 based on a 0.275% per trade. Note that this is a one-time charge.

 

Portfolio Price Bought No. Of shares Value
STI ETF $3.250 per lot 6923 shares $22,500
A35 ETF $1.155 per lot 6494 shares $7,500
$29,680

Note: Shares weren’t rounded off to illustrate the effects

Based on this asset allocation, John will have to rebalance the portfolio either half-yearly or on an annual basis. Given that John chooses to rebalance his portfolio annual and the prices of the ETFs are STI ETF – $3.410 and A35 ETF – $1.108. John will have to rebalance this portfolio to bring the asset allocation back up to 75% stocks and 25% bonds.

Before Rebalancing

Portfolio Price No. Of shares Value Proportion of Portfolio
STI ETF $3.410 per lot 6923 shares $23,607 76.64%
A35 ETF $1.108 per lot 6494 shares $7,195 23.35%
$30,802 100%

Note: Shares weren’t rounded off to illustrate the effects.

After Rebalancing

Portfolio Price No. Of shares Value Proportion of Portfolio
STI ETF $3.410 per lot 6774 shares $23,099 75%
A35 ETF $1.108 per lot 6949shares $7,699 25%
$30,798 100%

Note: Brokerage charges are incurred when rebalancing is done, hence minor adjustments to the portfolio will not be feasible. The example depicted is purely for illustration purposes.

John has to sell some of the STI ETF and buy into the A35 Bond index. The act of rebalancing aims to sell the winners to lock in profit and plough the profit into buying weakness in the other asset class. This strategy is in lockstep with finance theory, which states that asset prices tend to revert to mean in the long run.

The strategy has the convenience that the investor does not need to monitor the markets and the act of rebalancing takes away the emotions involved in investing.

In conclusion, passive investing aims to capture market returns based on indexes and since it is the benchmark for a large range of investment funds, pursuing this strategy ensures the investor is guaranteed the market return.

In the next series, we will be touching on investment products offered by financial institutions, which also has the convenience of passive investing. Continue to follow us on Facebook!

 

Royalty-free photo from Getty Images. Used with appreciation.

 

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