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 Singapore, the benchmark index is the Straits Times Index (STI), and there are two ETFs – the SPDR STI ETF and the Nikko AM Singapore STI ETF – that we can invest in that track this index.
What Is A Benchmark index?
We first need to understand what a benchmark index is.
A benchmark index of a country usually refers to the largest and most liquid stocks listed in a stock market. In Singapore, this is the Straits Times Index, or STI, is made up of the 30 strongest stocks listed in Singapore. This list includes DBS, UOB, OCBC, SingTel, Keppel Corporation, CapitaLand and 24 other blue-chip 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 purpose of allowing investors to measure (or benchmark) 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 track the Straits Times Index: 1) SPDR STI ETF; and 2) Nikko AM Singapore STI ETF. We can invest in these ETFs in 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 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 (STI) 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 reputable 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.
As the SPDR STI ETF has been around longer, it has a longer track record we can rely on for information. Nevertheless, both have been around for more than 10 years to look at their past track record.
#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 slice of investments into the STI ETF. The SPDR STI ETF has $1.6 billion under management, while the Nikko AM Singapore STI ETF has $477 million under management.
The performance of an ETF is usually based on how closely its returns are 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 and incurs trading costs while trying to match the benchmark returns.
The SPDR STI ETF delivered a 1-year annualised return of -8.69% (as at Nov 2020). In the past five years, the SPDR STI ETF has delivered an annualised return of 3.17%.
The Nikko AM Singapore STI ETF delivered a 1-year annualised return of -8.99% (as at Nov 2020). In the past five years, the Nikko AM Singapore STI ETF delivered an annualised return of 3.02%.
Comparatively, the Straits Times Index delivered a 1-year return of -8.26% and a 5-year annualised return of 3.57%.
(as at Nov 2020)
(as at Nov 2020)
|Straits Times Index (STI)||-8.26%||3.57% per annum|
|SPDR STI ETF||-8.69%||3.17% per annum|
|Nikko AM Singapore STI ETF||-8.99%||3.02% per annum|
As you can see, both the STI ETFs achieved a slightly lower return compared to the benchmark STI. SPDR STI ETF managed to deliver a slightly better performance, but the margin is not that big.
#5 Expense Ratio
The total expense ratio (TER) 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. Obviously, the lower the expense ratio, the better it is for investors.
Both the SPDR STI ETF and the Nikko AM Singapore STI ETF have an expense ratio of 0.3% per annum.
While both STI ETFs technically charge the same amount, SPDR is actually receiving more money because of its larger asset under management (AUM).
#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 0.2833% (as at Aug 2020), while the Nikko AM Singapore STI ETF has a 3-year annualised tracking error of 0.17% (as at Nov 2020).
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 investors.
Both SPDR STI ETF and Nikko AM Singapore STI ETF have a distribution policy of paying out dividends semi-annually. Nevertheless, this means that the ETFs do not pay out dividends immediately each time it receives them from its investments. Instead, the STI ETFs hold 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 3.92%, while the Nikko AM Singapore STI ETF has a dividend yield of 4.13%.
|No.||How They Differ||SPDR STI ETF (SGX: ES3)||Nikko AM Singapore STI ETF (SGX: G3B)|
|1||Manager||State Street Global Advisors||Nikko AM|
|2||Track Record||Close to 18 years (Listed on 17 April 2002)||More than 11 years (Listed on 24 February 2009)|
|3||Fund Size||$1.6 billion||$477 million|
|4||Performance (as at Nov 2020)||1-year: -8.69%
5-year: 3.17% per annum
5-year: 3.02% per annum
|6||Tracking Error||Rolling 1-year tracking error: 0.2833%||3-year annualised tracking error: 0.17%|
|7||Dividend||3.92% (paid semi-annually)||4.13% (paid semi-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 can be used as a great complementary passive investment strategy to diversify our risk, even as we take on riskier investments in the market.
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