This article was first published on 29 November 2018 and been updated to include the latest information.
For those new to investing, putting your money in a benchmark index is one of the easiest ways to begin your journey. In this article, we discuss what benchmark indexes are, and compare the two ETFs – the SPDR STI ETF and the Nikko AM Singapore STI ETF – that track Singapore’s benchmark index, the Straits Times Index (STI).
What Is A Benchmark index?
We first need to understand what a benchmark index is.
A benchmark index usually refers to the largest and most liquid stocks 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. This list includes DBS, UOB, OCBC, SingTel, Keppel Corporation, CapitaLand and 24 other strong companies. Combined, these companies comprise over 80% of the entire market value of stocks listed in Singapore, hence, it is representative of how the Singapore market performs.
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 (NYSE) and NASDAQ.
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 rather than taking additional risks or actively managing their portfolio.
How To Invest In The Benchmark Index?
We can’t invest directly in the benchmark index. We have to rely on exchange traded funds (ETFs) that track the benchmark index by replicating 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 broad exposure to the entire Singapore market.
Which Is Better – The SPDR STI ETF VS The Nikko AM Singapore STI ETF?
Since there are two STI ETFs, the common question is which should investors choose?
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 Fund Size
A larger fund is typically looked upon as more trusted, stable and better able to enjoy economies of scale.
Since the SPDR STI ETF has been around longer, it has also been able to capture a larger slide of investments. The SPDR STI ETF has $1.3 billion under management, while the Nikko AM Singapore STI ETF has $350.9 million under management.
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.
The SPDR STI ETF delivered a one-year annualised return of -15.29% (as at Aug 2020). This should not be surprising as the STI delivered a one-year return of -15.00% in that time. In the past five years, the SPDR STI ETF has delivered an annualised return of 0.6%, compared to the STI’s 0.96% annual return.
The Nikko AM Singapore STI ETF delivered a one-year annualised return of -20.58% (as at Jul 2020). Again, this is not surprising as the STI delivered a one-year return of -20.06% in that time. In the past five years, the Nikko AM Singapore STI ETF delivered an annualised return of -1.38% while the STI returned -0.94% annually in the same period.
While it looks like the SPDR STI ETF did better by losing less, we have to be conscious of the date of their respective performance. Compared to how the benchmark did at the time, both ETFs performed similarly, albeit slightly poorer due to their management fees.
#5 Expense Ratio
The expense ratio measures how much of a fund’s assets are used for its operations, including for administrative and miscellaneous reasons. The biggest component of a fund’s expense ratio is typically its fund management fees.
Both the SPDR STI ETF and the Nikko AM Singapore STI ETF have an expense ratio of 0.3% per annum.
Obviously, the lower the expense ratio, the better it is for investors.
#6 Tracking Error
If we ignore management fees, performing worse off than the market is always frowned upon. However, for ETFs, performing significantly 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 rolling 1-year tracking error of 0.1257% (as at Aug 2020), while the Nikko AM Singapore STI ETF has a 3-year annualised tracking error of 0.15% (as at Jul 2020).
The SPDR STI ETF has a slight edge in matching the returns of the Straits Times Index more closely. This could be down to its larger size.
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.
The SPDR STI ETF has a policy of paying out dividends semi-annually, while the Nikko AM Singapore STI ETF pays out annually. 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 the SGX ETF Screener, SPDR STI ETF has a dividend yield of 4.47%, while the Nikko AM Singapore STI ETF has a dividend yield of 4.91%.
|No.||How They Differ||SPDR STI ETF (SGX: ES3)||Nikko AM Singapore STI ETF (SGX: G3B)|
|1||Manager||State Street Global Advisors Singapore Limited||Nikko AM Singapore STI ETF|
|2||Track Record||Close to 18 years (Listed on 17 April 2002)||More than 11 years (Listed on 24 February 2009)|
|3||Fund Size||$1.3 billion||$350.9 million|
|4||1-Year Performance||-15.29% (st at Aug 2020)||-20.58 (as at Jul 2020)|
|7||Dividend||4.47 (paid semi-annually)||4.91% (paid annually)|
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 in Singapore and even outside of Singapore.
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.
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