For those who want to start investing, putting your money in a benchmark index is the easiest and best way to begin your journey. In this article, we discuss what benchmark indexes are, and how the two benchmark indexes that are listed in Singapore – the SPDR STI ETF and the Nikko AM Singapore STI ETF – are similar and different.
What Is A Benchmark index?
We first need to understand what benchmark indexes are.
A benchmark index usually comprises the largest and most liquid stocks that are listed in a stock market. In Singapore, this is the Straits Times Index, or STI, made up of the 30 strongest stocks listed in Singapore, including DBS, SingTel, Keppel Corporation, CapitaLand and 26 others. These companies comprise close to 80% of the entire market value of stocks listed in Singapore, hence, it is appropriate to say that it is representative of the Singapore market.
In Hong Kong, the benchmark index is the Hang Seng Index, or HSI, made up of 50 of the strongest stocks listed in Hong Kong. In Australia, it is the ASX 200, made up of 200 of the strongest liquid stocks listed in Australia. In the USA, it is the S&P 500, made up of close to 500 of the strongest stocks listed on the New York Stock Exchange and NASDAQ.
You get the point – the benchmark index in a country is usually made up of the strongest stocks in the country, which are typically the largest and most liquid stocks. This is why we can refer to the return from benchmark indexes as the market returns.
A benchmark index also serves the dual purpose of allowing investors to measure their investment portfolio performance against the market returns. Of course, investors should aim to beat the market returns in any given year, otherwise, they would have been better off investing in the benchmark index.
How To Invest In The Benchmark Index?
We can’t invest directly in the benchmark index. We have to rely on exchange traded funds, or ETFs, to track the benchmark index by creating a fund that invests in its component stocks.
In Singapore, there are two ETFs that tracks the Straits Times Index – the SPDR STI ETF and Nikko AM Singapore STI ETF. We can invest in them the same way we typically invest in other stocks listed on SGX – via a brokerage account (and by having a CDP account).
Read Also: Complete Guide To Investing In The STI ETF
Thus, with just a single investment into either of these STI ETFs, investors are able to gain exposure to the entire Singapore market.
Which Is Better – The SPDR STI ETF VS The Nikko AM Singapore STI ETF?
Both the SPDR STI ETF and the Nikko AM Singapore STI ETFs aim to track the Straits Times Index as closely as possible. Here’s a comparison of its differences to help make a decision on which STI ETF to invest in.
# 1 Fund Managers
The most obvious difference is that the two STI ETFs are managed by different fund managers. The SPDR STI ETF is managed by State Street Global Advisors Singapore Limited, one of the largest fund management firms in the world. Nikko AM Singapore STI ETF is managed by Nikko Asset Management Asia Limited, one of the largest asset managers in Asia.
In this regard, both can be said to be equally matched as they are managed by reputed and stable fund management firms.
# 2 Track Record
Track record is important when it comes to investing. SPDR STI ETF was listed on the SGX on 17 April 2002, while Nikko AM Singapore STI ETF was listed on the SGX on 24 February 2009.
Between the two, SPDR STI ETF has been around longer, and thus have a longer track record we can rely on for information.
# 3 Size
A larger fund is typically looked upon as more trusted, stable and better able to enjoy economies of scale.
SPDR STI ETF has $642.4 million under management, while the Nikko AM Singapore STI ETF has $229.2 million under management.
# 4 Performance (Tracking Error)*
The performance of an ETF is usually based on how closely its returns is able to track the index it is trying to replicate. This also means that it will almost always underperform the market, as it charges a management fee.
If we ignore management fees, performing worse off than the market is always frowned upon. However, for ETFs, performing better than the index is also not viewed as a positive thing. This is because its job is to replicate the market returns as closely as possible.
The difference in replicating the market returns is usually referred to as tracking error. The SPDR STI ETF has a tracking error of 0.041%, while the Nikko AM Singapore STI ETF has a tracking error of 0.15%.
The SPDR STI ETF has a slight edge when it comes to delivering returns that is able to match the returns of the Straits Times Index more closely.
# 5 Expense Ratio
The expense ratio measures how much of a fund’s assets are used for its operations, including administrative and miscellaneous reasons. The biggest component of a fund’s expense ratio is typically its fund management fees.
The SPDR STI ETF has an expense ratio of 0.3%, while the Nikko AM Singapore STI ETF has an expense ratio of 0.33%.
Obviously, the lower the expense ratio, the better it is for investors.
# 5 Dividend**
The component stocks within the Straits Times Index usually pay out dividends. In fact, Singapore stocks are known to pay some of the best dividends across Asia. These dividends will be paid to the respective ETF, which will subsequently pay out these dividends to its shareholders.
Both the SPDR STI ETF and Nikko AM Singapore STI ETF has a policy of paying out dividends semi-annually, or twice a year. This means that it does not pay out dividends immediately each time it receives them from its investments. Instead, it holds on to the dividends, and pay it out at regular intervals.
According to figures from Bloomberg, SPDR STI ETF has a “dividend indicated gross yield” of 3.85%, while the Nikko AM Singapore STI ETF has a “dividend indicated gross yield” of 3.16%.
|No.||How They Differ||SPDR STI ETF (SGX Stock Code: ES3)||Nikko AM Singapore STI ETF (SGX Stock Code: G3B)|
|1||Manager||State Street Global Advisors Singapore Limited||Nikko AM Singapore STI ETF|
|2||Track Record||More than 16 years (Listed on 17 April 2002)||Close to 10 years (Listed on 24 February 2009)|
|3||Fund Size||$642.4 million||$229.2 million|
|6||Dividend**||3.85 (Paid semi-annually)||3.16% (Paid semi-annually)|
* Tracking error for SPDR STI ETF was retrieved from its latest fact sheet (31 October 2018), indicating a 1-year rolling error of 0.041%. Tracking error for Nikko AM Singapore STI ETF was retrieved from its latest fact sheet (31 October 2018), indicating a 3-year annualised tracking error of 0.15%.
**Dividend information was retrieved from Bloomberg, as no figures were mentioned on either ETFs’ annual reports.
Why The STI ETF Makes A Logical Investment For Many
The STI ETF is a viable investment for both beginners and experienced investors.
For beginner investors, it offers a safe way to get started even without much investing knowledge or experience. We also don’t have to monitor our investments too closely, and can embark on a passive investing strategy, as our portfolio is instantly diversified with the 30 strongest stocks listed in Singapore. Of course, we can use this as a springboard to learning more about investing, and eventually setting aside a portion of our portfolio to invest in individual stocks.
Moreover, indexes are also regularly reviewed and adjusted, and any changes made to the index will be replicated by our fund managers. As fund managers are just replicating the adjustments made to indexes, their fund management fees are typically much lower than actively managed funds.
For experienced investors, it makes a great passive investment strategy to diversify our risk, even as we take on riskier investments in the market.