A Complete Guide to Investing in ETFs in Singapore (2022)
You have some excess cash, and the most common suggestion you probably got was to put your money in some good ol’ ETFs. If you’re scratching your head at what ETFs are or how to invest in them in Singapore, you’ve come to the right place!
Before we dive in, make sure you have an investment plan in mind. This plan will guide you in making wise investment decisions to maximise your returns.
If you’re not convinced about making an investment plan, then do check out our list of reasons why you should consider making one!
ETFs are one of the safest and more stable investment options available to investors like you and me in Singapore. Warren Buffet, one of the greats in the field of investments, is also famously a great proponent of investing in ETFs, hence you have made the right choice to learn more about it!
In this article, we will cover,
What ETFs are
Pros and Cons of ETFs
Types of ETFs available
How to choose the right ETFs
How to invest in ETFs
What are ETFs?
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An ETF (Exchange Traded Fund) is a pooled investment fund which tracks the performance of an underlying index like the STI in Singapore. The shares of an ETF are listed in a stock market and can be traded just like shares of any other company.
An index, in turn, is a way to track the performance of a basket of securities. For instance, the STI in Singapore tracks the performance of shares of the 30 largest public companies in the country by market capitalisation.
Therefore, when you buy ETF shares, you are funding investments into the companies that are listed in the index being tracked.
Pros & Cons of ETFs
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Pros
1. Diversification
The most distinct feature of an ETF is the ease of diversification by investing in it. As an ETF tracks an index of multiple companies, you are instantly diversifying your investment when you buy a share of an ETF. Therefore, you are spreading your risk, which makes ETFs more resistant to sudden fluctuations.
2. Lower Fees
If you were to individually invest in all the companies that make up an index, you would incur a commission for each of those trades. However, with ETFs, you only incur fees once for a portfolio of multiple companies. Thus, the cost of investing in ETFs compared to stocks is generally lower.
When comparing ETFs to mutual funds, ETFs tend to have cheaper fees relative to the fees charged by mutual funds. These fees are compared primarily by their expense ratio.
An expense ratio measures how much of a fund’s assets need to be used to cover other expenses incurred by the mutual fund or the ETF. It is calculated by the fraction of the Fund’s Total Cost over the Fund’s Total Assets.
3. Functions like a normal stock
ETFs can be traded like a normal stock whereby the prices are updated constantly unlike open-ended mutual funds.
You can also manage risk, through methods like futures contracts, options or short selling. Hence, there are ways to turn a profit on your ETFs regardless of how the market moves.
Cons
1. Volatile
Despite an ETF’s reputation for being a safe investment, it does not equate to a stable investment option. It is subject to the same market volatility as individual stocks too.
Furthermore, ETFs that track stocks in a specific industry/sector tend to be more volatile.
External factors could also affect a broad-based ETF’s price. For instance, the S&P 500 this year posted the worst first half since 1970 in response to the Ukraine War.
With such risk involved in investing in a stable vehicle like ETFs, you may wonder how much risk is too much in investments in Singapore.
However, it's not uncommon to be unsure of your risk appetite, and Techiya has the perfect solution — a risk calculator to better know your risk profile.
2. The disparity between the value of ETFs & Underlying Securities
It is not always that the value of the ETF mirrors the value of the index exactly. When you buy an ETF share, you could be paying more (or sometimes less) than the true value of the underlying securities.
This disparity can be measured by an ETF’s tracking error, which is a good way for you to judge if it is a safe investment.
3. Low Liquidity
Liquidity refers to the ease at which one can convert assets into cash without affecting its market price.
The factor of low liquidity only pertains to certain ETFs. One way to identify such an ETF is the spread. If there is a large difference between the bid and ask, it will be difficult to cash out your positions at the intended value.
4. Not suitable for active investors
An investment in ETFs is an investment in the market. Should you want to beat the market, ETFs are not the right tool.
You could sometimes be better off investing in a few particular stocks that outperform the index if you are investing for the short term. If you are an active/short-term investor, do consider this when investing in ETFs.
Types of ETFs available
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REIT ETFs
REIT (Real Estate Investment Trust) is a company which funds investments in real estate projects. REITs allow anyone to invest in the property market by pooling together investments from a large group of investors to make property investments.
One way to invest in REITs is through investing directly in a specific REIT. However, like traditional stocks, there are REIT Indexes and ETFs in Singapore which track them as well thus making REIT ETFs another viable option too.
These are the REIT ETFs available in Singapore:
Commodity ETFs
Commodity ETFs work similarly to REITs as mentioned above, just that the trusts invest in commodities like gold, oil, wheat, etc. instead of properties.
The ETFs track the commodity prices or their corresponding indexes, hence the price of the ETFs is backed by the value of the physical assets.
These ETFs allow anyone of us in Singapore to invest in these assets without having to physically handle those commodities, which will incur transportation and storage costs. This essentially drastically reduces the barriers to investing in commodities.
Here are 2 ETFs to give you an overview of the types of commodity ETFs available:
1. SPDR Gold Share (SGX: 087, GSD)
Only one commodity ETF is available in Singapore which is the SPDR Gold Share (SGX: 087, GSD) which has an expense ratio of 0.40%. The SPDR gold share allows investors to take part in the gold bullion market without having to handle the physical gold.
2. US 12-month oil fund (NYSE Arca: USL)
The US 12-month oil fund (NYSE Arca: USL) is a commodity ETF that is listed on the New York Stock Exchange. This unique ETF allows investors in Singapore to invest in US oil futures contracts instead of physical oil itself.
For the more experienced investors, this could be an attractive option to diversify their investments.
STI ETFs
The Straits Times Index (STI) is Singapore’s benchmark ETF index just like New York’s S&P 500 and London’s FTSE. It comprises the 30 largest companies (by market capitalisation) in Singapore, which include DBS, OCBC, SingTel etc.
These 30 companies make up a large percentage of the total market value of shares listed in Singapore. Hence, the STI is a good gauge of the country’s general market performance.
Since the STI is an index, you can’t invest in it directly in Singapore. There are instead 2 ETFs which track the STI Index, that you can invest in, to diversify your investments in the Singapore market:
SPDR STI ETF
Nikko AM STI ETF
If you are wondering which ETF to invest in, both options are actually similar in terms of returns, tracking errors, and expense ratio. The only difference is that the SPDR ETF is more established in Singapore, which is why there are sometimes marginally better returns on the SPDR than Nikko AM.
The STI ETF is hence a safe option for beginners to invest in, given the highly credible and relatively stable Singapore economy.
Overseas ETFs
Besides investing in ETFs based on Singapore's index, there are other attractive ETF options abroad as well. These ETFs greatly improve the exposure of your portfolio to foreign markets, which means you can benefit from stable and growing economies elsewhere too!
Here are 2 prominent overseas ETFs to consider:
1. SPDR S&P 500 ETF
The SPDR S&P 500 ETF is a popular and safe investment option in the realm of overseas ETFs. It tracks the S&P 500 index which comprises the 500 largest companies in the US by market capitalisation.
The group of companies listed includes well-established blue chip stocks like Apple, Amazon, JP Morgan, and ExxonMobil. Hence, this index is often seen as an attractive investment option to hitch a ride on these fast-growing companies.
2. Vanguard Total International Stock ETF
This ETF tracks the FTSE Global All Cap ex US Index. This is a popular ETF which gives investors in Singapore a broad diversification of their portfolio with a low expense ratio of 0.07%.
There is, however, a caveat to investing in US-listed ETFs. Read on to learn more about it in the next section.
Choosing the right ETF
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Value vs Growth ETFs
Once you get your head into the ETF game in Singapore and you start understanding your options, there is a dilemma you could soon face – should you pick Value or Growth ETFs?
Value ETFs are a conservative option that have lower long-term returns but will be stable through volatile markets. They also tend to have larger dividend yields due to the more financially-stable nature of companies under Value ETFs.
Growth ETFs give a stronger longer-term return but carry more risk with it, especially in volatile markets.
The key to deciding between them is your age group. If you are someone who’s approaching retirement or already retired, a Value ETF will be ideal.
The constant cash flow through dividends will provide you with much-needed disposable income to supplement your retirement life. Furthermore, with a shorter time frame, a stable low-risk portfolio will be ideal to ensure your investments don’t cripple your finances.
Therefore growth ETFs will be ideal for younger investors in Singapore, who have more time to allow their investments to grow through volatile markets. However, you younger investors will one day need some retirement savings and we have curated ways for you to plan for just that too!
Global vs Local ETFs
Another dilemma is to choose between Global ETFs or ETFs in Singapore. In this case, it depends on the global ETF you are considering.
If you were considering an ETF in a nation which has an unstable economy and a crippling political scene, it would be more advisable to invest in our city state’s ETFs for a stable investment.
However, if the global ETF is in a well-developed and economically-stable country, you could be better off splitting your capital between both global and local ETFs. Remember diversification?
It’s usually not a good idea to put all your eggs in one basket given the limited knowledge we have about future market movements. Hence, if both your options are stable and financially healthy economies, it would be wise to diversify into both markets.
Cost of Investing in ETFs
When choosing to invest in popular US-listed ETFs like the SPDR S&P 500, there is often an overlooked caveat to your capital gains. That is the 30% withholding tax on dividends from US ETFs.
This will significantly bite into your gains especially when investing in large sums. Hence, the small expense ratio becomes not so small anymore when you factor in the tax expenses.
Therefore, investing in ETFs from Singapore does come with some downsides that you should take note of when investing.
How to invest in ETFs
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Brokerages
You can conveniently trade ETFs through brokerages like Tiger Trade or Moomoo, in Singapore, since they function just like traditional stocks. With brokerages, you have complete freedom to trade your ETFs through various methods like options, short selling, or futures contracts.
Robo Advisors
Robo advisors in Singapore, are a great way for you to invest in ETFs, as they boast a great variety of portfolio options to invest in. You can also customise your portfolio based on your risk preferences and choose to invest in different ETFs in your portfolio.
If you aren’t sure which brokerage or robo advisor to use, we have curated a list of the 9 best investment apps for you as well!
Regular Savings Plan (RSP)
A regular savings plan in Singapore allows you to employ a similar method to the dollar cost average (DCA) strategy for investing in ETFs. This method will be ideal for those who prefer a hands-off approach to invest in ETFs!
It is difficult to time a good point to enter the market, therefore RSPs counter that through consistent fixed investments per month. By doing so, your momentary losses at one entry point will be covered by gains at another entry point.
Assuming the value of that security increases and nothing else changes, this strategy could give a steady positive return for patient investors. Hence with ETFs, this would be a great way to increase the value of your disposable income.
For instance, there are local banks like DBS/POSB which allow you to invest in ETFs like the Nikko AM STI ETF or ABF Singapore Bond Index Fund.
Do check out our list of other RSP options you could consider as well!
Conclusion
Getting into ETFs may seem daunting initially but once you get the hang of it, you will realise that it's a fairly simple instrument to easily diversify your investments. We hope that this guide gives you greater clarity on the world of ETFs.
However, even before you start investing, you might be unsure how much is the right amount to invest. Maybe with the rising costs in Singapore, you are unsure of how much returns you should expect from your ETFs, to beat inflation.
If that’s the case, fret not, you probably just need some advice and a financial advisor would be able to give you just that!
You won't be alone if you consider a financial advisor as around 61% of Singaporeans reportedly consult one, so there’s no need for hesitation.
Contrary to their reputation for pushy sales tactics, financial advisers help new investors cut through the noise.
They can arrange your investments and build a financial plan that helps ensure you will meet your financial goals in a sustainable manner.
With regards to investment planning, they do the following:
Identify your current life stage
Identify your goals, needs and wants
Find out how much you will need for each need, wants, and goals
Plan how you can achieve these goals
Build and optimise your financial investments
To help you take control of your personal finance, Techiya offers a free comprehensive and personal financial assessment worth over $200 for individuals, don’t miss out on this!
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