[2023 Edition] Complete Guide To ETF investing in Singapore (2024)

Investing in ETFs is one of the easiest and most cost-effective ways to start our investment journey.In recent years, ETFs have been gaining more attention and widespread popularity. Today, withmore than 8,754 ETFs listed globally (as of 2022) adding up to over US$10 trillion in managed assets, ithas overtaken active investing.

While many ETFs tend to provide broad-based market exposure, the diversity andcomplexity of ETFs have also evolved since the creation of ETFs in 1990. Apart from replicating country indexes, there are ETFs todayfor very specific business sectors, regions, asset classes, as well as more complicated leveraged and synthetic ETFs.

What Is AnETF?

ETFs are listed on stock exchanges and seek to replicate the returns of an index. The index can be broad country-based indexes such as the Straits Times Index (STI), Hang Seng Index (HSI) or S&P 500 Index. Or, it can also replicatenarrower indexes that track specific business sectors, geographical regions or asset classes.

ETFs can also be muchmore complicated. There existsETFs thatare actively managed, employ leverage, provide exposure to derivatives and even inverse relationships (i.e. they take the opposite side of an asset price).Since ETFsare listed on stock exchanges, we can also buy and sell them, just like we trade other stocks and bonds listed on the exchange.

How To Invest In ETFs In Singapore?

The most common way to invest in ETFs is through a stock brokerage account – similar to how we buy and sell stocks in Singapore. According to the Singapore Exchange (SGX), there are 60 ETFs listed in Singapore. The actual number may be lower, as some ETFs are listed in dual currencies.Apart from SGX, we can also invest in ETFs listed on overseas exchanges, such asHong Kong and the U.S, through our stock brokerage accounts.

We can also invest in ETFs through Regular Shares Savings (RSS) plans in Singapore. There are currently 4 RSS providersin Singapore. On FSM One, for example, we can also invest in over 120 ETFs in Singapore, Hong Kong and the US (as well as over 1,700 unit trusts and 10 managed portfolios)under their RSS plan.

A thirdway investors can gain exposure to ETFs is by investing via robo-advisory platforms in Singapore. There are currently at least 11 robo-advisory platforms in Singapore, and majority of them offer their solutions using ETFs. Predominantly, the ETFs that robo-advisory platforms use are exposed to broad indexes listed in the U.S.

Read Also: Step-By-Step Guide To Investing Using Regular Shares Savings (RSS) Plans In Singapore

Benefits Of Investing In ETFs

We benefit infour main ways when investing in ETFs:

#1 Low Barrier Of Entry For New Investors

Investing in ETFs is the perfect way for new investors to get started as they do not need a lot of investment knowledge or skills to start investing. Investors also would not have to spend much time monitoring or rebalancing their investments, as they simply try to replicate an underlying index that already methodicallyupdates their index constituents.

#2 Low-Cost Method To Invest

ETFs usually charge lower management fees compared to actively managed funds. This is because ETFs simply follow instructions on what to invest in by replicating the index. By not having an active fund manager stock picking or timing stock prices, we are able to save on the fund manager costs.

For example, the SPDR S&P 500 ETF has a net expense ratio of 0.0945%. The SPDR STI ETF has a total expense ratio of 0.3%. Typically, the larger the ETF, the lower it can afford to charge for its expense ratio. We can also invest in Vanguard’sS&P 500 ETF in the U.S., which charges a total expense ratio of 0.03%.

Read Also: Complete Guide To Investing In The Straits Times Index (STI) ETFs In Singapore

#3 Instant Diversification

Depending on the index that the ETF is tracking, we can technically build our entire portfolio with just a single investment in an ETF.

Forexample, byjust investing in theS&P 500 ETF, our portfolio will comprise close to 500 blue chip stocks covering about 80% of the market capitalisation in the U.S. Furthermore, this investment will be diversified to the IT (26%), Healthcare (14%), Financials (13%), Consumer Discretionary (10%), Industrials (9%), Communications (8%), Consumer Staples (7%), Energy (5%) and more.

Another example is the iShares MSCI All Country World Index (MSCI AWCI) ETF. When we invest in it, our portfolio willhaveover 2,300 constituents. We will have just over 60% exposure to the U.S., with the remaining exposure coming mainly from Japan (5%), China (4%), the U.K (4%), Canada (3%), France (3%), Switzerland (3%), Australia (2%), Germany (2%), Taiwan (2%) and others (12%). Of course, we will also be diversified to the different sectors: IT (20%), Financials (16%), Healthcare (12%), Consumer Discretionary (11%), Industrials (10%), Communication (7%), Energy (5%) and more.

#4 Passive Approach To Investing

By investing in ETFs, we are taking the decision to pick stocks out of our hands. We are simply letting the index dictate which stocks we should be investing in.

If we invest in a broad country index, again, like the S&P 500, we will essentially earn the market returns of the U.S. market. This way, we do not try to time the market or beat the market – we only want to earn the market returns over the long term.

Another way we enjoy a passive approach to investing is that we do not have to monitor our investments so closely. This is because the index usually has a methodology for addingand removing constituent stocks. This means that once a stock does not fit into the methodology, it is automatically removed from the index, and by default the ETF. This is how a good index (and the ETFs tracking it) can last for a very long time, while individual stocks may not.

Read Also:Investing In ETFs: What Happens When A Constituent Is Removed From The Index?

Downsides Of Investing In ETFs

Similarly, there are four main disadvantages to investing in ETFs.

#1 ETFs Always Underperform The Index

When we invest in an ETF, we can never earn extraordinary returns. As mentioned, it is akin to decidingto earn just the market return, minus the costs and fees that we incur.

These cost and fees include, brokerage fees when we buy or sell an ETF, and annual management fees and other expenses for holding the ETFs. For these reasons, we will never earn the return that the index actually delivers either. However, we shouldstill earn a return that is just slightly lower thanit, because costs should be minimised.

#2 Will Never Pick Up On Good Stocks To Invest In

Remember, the ETF is simply following instructions on what to buy from the index. Unlike active fund management, where there’s an active fund manager speaking to companies and keeping their ears on the ground in order to earn better returns and pick up on growth trends earlier.

#3 False Sense Of Security For Investors

By investing in an ETF, even one as broad and diversified as the S&P 500 ETF, we may falsely think that our investments are safe. To be clear – every investment carries risk.

Case in point, during the market crash from February to March 2020, the S&P 500 declined 32% in the space of approximately one month. This shows that ETFs can fluctuate wildly, especially when there is a market-wide crash.

What we are sheltered from is the risk of an individual stock or industry performing poorly within the ETF. Again, for example, there are over 2,300 stocks on the iShares MSCI AWCI ETF, if any one company does exceptionally poorly or becomes embroiled in a legal case, it should have a relatively small impact on our overall portfolio.

#4 No Control Over Investing Or Divesting

We’ve covered this point a few times now – the job of an ETF is to simply replicate anindex. This means that if the index removes a stock that we really like, the ETF will alsosell that stock. Similarly, if the index adds a stock we absolutely do not want to touch, the ETF will still purchase that stock.

For example, the Straits Times Index recently removed ComfortDelGro and added newly-listed alcoholic beverages group Emperador in September 2022. The two STI ETFs – managed by SPDR and NikkoAM – in Singapore will have to react to this by divesting their ComfortDelGro shares and buying Emperador shares. To drive home the point, the two STI ETFs have to do this even ifthey (hypothetically) believe ComfortDelGro will perform better.

With the benefit of hindisght, we can see that ComfortDelGro share price declined 6% in the past six months, while Emperador’s shares increased by 3%. Again, this is not to say that stocks that an index removes will always underperform the new stock that replaces it.

Read Also: Pros And Cons Of Building An ETF-Only Portfolio

Best ETFs In Singapore To Invest In

There’s really no right or wrong answer as to which ETFs are the best to invest in. One possible answer is investingin ETFs that are exposed to broad country/sector indexes.

In Singapore, we can invest in these sixpopular ETFs listed locally:

#1 STI ETFs: SPDR STI ETF (SGX: ES3) / NikkoAM Singapore STI ETF (SGX: G3B)

The SPDR STI ETF and NikkoAM STI ETFs both seek to replicate Singapore’s 30-stocks Straits Times Index (STI). As many of us would already be familiar with, the largest companies on STI include DBS, OCBC, UOB, Jardine Matheson, SingTel, Ascendas REIT, CapitalandInvest and more.

Read Also: SPDR STI ETF VS NikkoAM Singapore STI ETF: What’s The Difference Between These 2 Straits Times Index ETFs Listed On The SGX?

#2 Overseas ETFs: S&P 500 ETF: SPDR S&P 500 ETF Trust (SGX: S27);Lion-OCBC Securities China Leaders ETF (SGX: YYY);Lion-OCBC Sec Hang Seng TECH ETF (SGX: HST)

We’ve covered the S&P 500 ETF in the article. It invests in approximately 500 blue chip companies listed in the US, such as Microsoft, Apple, Amazon, Tesla, Alphabet (Google), Meta Platforms (Facebook), NVIDIA, Berkshire Hathaway and more.

The Lion-OCBC Securities China Leaders ETF invests in 80 of the largest Chinese companies, includingPing An Insurance, Kweichow Moutai, ICBC, Tencent, BYD and others.

The Lion-OCBC Sec Hang Seng Tech ETF will comprise 30 of the largest technology stocks listed on the Hong Kong Stock Exchange. It includes popular stocks such as Alibaba, Tencent, Meituan, Xiaomi, JD.com, Lenovo, Ping An, ZTE, Foxconn and others.

Read Also: 5 Things You Need To Know About The Lion-OCBC Sec Hang Seng Tech ETF Before Invest In It

#3 Bond ETFs: ABF Singapore Bond ETF (SGX: A35);Nikko AM SGD Investment Grade Corporate Bond ETF (SGX: MBH)

The ABF Singapore Bond ETF invests in SGD-denominated bonds issued by the Singapore government and quasi-government entities.

As its name suggests, theNikko AM SGD Investment Grade Corporate Bond ETF invests in corporate bonds.These include the bonds of companies such as Temasek Financial, NTUC Income Insurance DBS, OCBC, UOB, Changi Airport Group, Aviva Singlife, Manulife Financial and more.

Read Also: How Fixed Income ETFs Can Help Protect Your Investment Portfolio In Singapore

#4 Gold ETF: GLD US$ ETF (SGX: O87)

The objective of the GLD US$ ETF is to reflect the performance of the price of gold bullion, less expenses.

Read Also: 5 Ways Investors In Singapore Can Invest And Gain Exposure To Gold As An Asset Class

#5 REIT ETFs: NikkoAM-Straits Trading Asia Ex Japan REIT ETF (SGX: CFA);Lion-Phillip S-REIT ETF (SGX: CLR);Phillip SGX APAC Dividend Leaders REIT ETF (SGX: BYJ); UOB APAC Green REIT ETF (SGX: GRN);CSOP iEdge S-REIT Leaders Index ETF (SGX: SRT);

REITs is a hugely popular asset class in Singapore. We can invest in as many asfiveREIT ETFs listed in Singapore.

Read Also: Investing In REIT ETFs: 5 Things You Need To Know

This article was originally written on 22 March 2021 and has been updated to provide the latest information.

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