We cannot stress the importance of investing enough. Earlier in the year, the European Intelligence Unit (EIU) ranked Singapore as the most expensive city in the world to live in. Even though the government defended this by making a case that Singaporeans tend to consume cheaper alternatives to international brands, the fact remains blatant to every working class person. We enjoy high standards of living and thus, must also suffer the cost of it.
In today’s context, leaving excess money in the bank equates to stashing money under your pillow. You earn close to nothing in interest returns and in the next 50 years, inflation will slowly eat away the value of your savings. One way we could alleviate some of this pain is through making investments. The basic premise of making an investment is to make your money work for you to generate more money in the future. And if you do this well enough or long enough, you would be able to achieve financial independence at some point.
Where To Put Your Money?
There are many ways to invest your hard earned savings but we will focus on Exchange Traded Funds (or more commonly known as ETFs) here. If you’ve been keeping up with our articles, you would notice that we are advocators of this investment instrument.
ETFs seek to mimic the performance of the index it is tracking. In Singapore, it would make sense to invest in the STI ETF tracking the Straits Times Index (STI). The STI is made up of the 30 biggest and best companies listed on the Singapore Exchange (SGX), including Singapore Telecommunications, Keppel Corporation, Ascendas REIT, Genting Singapore and other major companies.
Because these companies make up a significant portion of the value of all Singapore-listed companies, its returns are often looked at as a barometer of the Singapore market and the returns the STI ETF deliver is referred to as the market return.
Many beginner retail investors, without really knowing, just want to receive the market return. To invest in individual companies mean that investors have superior knowledge and are trying to gain a return that is in excess of the market return. To receive just the market return, all we need to invest in the STI ETF.
Benefits Of Investing In The STI ETF
Earning Market Returns
As mentioned, the STI ETF provides the market returns, something most retail investors are actually seeking. What this means is that retail investors are letting the market, and by default, the bigger investors look after his or her investments. Smaller retail investors would not have the time to meet the management team of every company, attend the annual general meeting, go through the financial statements of the companies and many other the other things that bigger investors have the resources to carry out.
The downside to this is that such an investor will never be able to see the kinds of profits that are worthy of news articles. But the investor can also take solace that, at the same time, he is also able to avoid the kind of losses that are worthy of news articles.
Achieving Diversification And Investment Reviewing
Investing in the STI ETF provides investors with an in-built diversification and investment reviewing function. This means that your risk has already been spread across the 30 biggest and best companies listed in Singapore. In addition, these 30 companies also operate in a diverse variety of sectors such as banking, property, commodity, telecommunications and others as well as have the business presence across the world. This further reduces your risk of losses arising from cyclical downturns in a particular sector or country.
Secondly, the STI is reviewed every quarter and any amendments made to it will be mirrored by the STI ETF. This review, which takes place every quarter, places an emphasis on free float and liquidity which aims to ensure the investability of companies. For example, recent changes to the STI list includes the removal of Sembcorp Marine, Jardine Strategic Holdings and Olam International and the inclusion of UOL Group, Yangzijiang Shipbuilding Holdings and SATS.
Investing in the STI ETF is a low-cost option for achieving the many benefits already highlighted. Functioning much like unit trusts or mutual funds, the STI ETF only costs a fraction of the expense. This management fee cost in the range of 0.3% instead of the over 1.5% that unit trusts and mutual funds often charge.
This is partially because of one of the most obvious characteristics of this investment method – passive investing. The STI ETF “blindly” follows what the STI does in terms of adjusting for changes in weightage and additions and removal of constituents. Much research has been done on the ability of fund managers to consistently make higher than market rate returns, and many of them point to inconclusive evidence that they are able to over the long term. So there should be no reason for us to pay the higher fees.
How To Start Investing In The STI ETF
For those keen to start their investment journeys or are not looking to beat the market returns, the STI ETF offers a very effective proposition. There are two ETFs that track the STI ETF, the SPDR STI ETF and the Nikko AM Singapore STI ETF. They are easily bought and sold on the stock market like any other stock and retain the high liquidity of their underlying assets. The actual cost of buying the shares of these two STI ETFs would be your brokers’ charges.
Another point to note is that the STI ETFs also offer good dividends, giving about 3% per annum in yields.
Not all ETFs are created equal and there are several out there that do not offer you the same benefits as the STI ETF described above. Do read closely into what you are buying into when you decide to make the investment.
DollarsAndSense.sg is a website that aims to provide interesting, bite-sized financial articles which are relevant to the average Singaporean. Subscribe to our free e-newsletter to receive exclusive content not available on our website. Follow us as well on Instagram @DNSsingapore to get your daily dose of finance knowledge through photos.