I would like to discuss about our Straits Times Index (STI). In my perspective this is a good place to start for new investors.
Although the STI has fallen by 20% in 2020 as of the time of this writing due to Covid-19, you can almost always be assured that the STI will never collapse. If there are any Companies within the STI that are not doing well, they will be removed in the quarterly reviews, and be replaced with a new Company that is performing well in the market. In some sense you will always be investing in the best Companies available listed on the SGX.
To invest in the STI, we could manually buy all the shares the STI tracks. This requires a lot of capital to do so. Alternatively, we could invest in an Exchange traded fund (ETF).
An ETF is an investment vehicle that holds a basket of assets (bonds/shares/commodities/debts). For the STI ETF, it tracks the performance of Singapore’s STI, which tracks the performance of the top 30 companies listed on SGX.
In this case, we look at the SPDR Straits Times Index ETF (SGX: ES3). It has been around much longer which can be seen from its fund size. An expense ratio of 0.30% per annum of its net asset value is also one of the lowest fees available in the market. So we can be assured it will not be affecting a significant portion of the distribution paid out.
In fact, the small expense fee is reasonable to pay to State Street Global Advisors to manage our investment and ensure it is up to date with the latest index requirements.
A bonus is the passive income comes with the semi-annual dividends they pay out. Based on historical data, it is usually at least above 3% yield, paid semi-annually on February and August. This is preferable compared to leaving it in the bank, or fixed deposits.
We may however be subjected to capital risks or if the fund decides to close down. The SPDR STI ETF does have a good historical record, but past results are not an indicator of future performances.
The closest competitor would be the Nikko AM STI ETF (SGX: G3B). It is similar except that it has a smaller fund size and a different manager.
Regardless of all major downturns, the STI index has been relatively resilient and able to rebound back within a few years. This indicates that as long as you hold you will be able to recover your capital eventually. Along the way collecting dividends.
Key things to note
Small presence in global markets
I recommended the STI index because it is something close to home for me at least. If you were to mention any stocks within the STI, the average daily consumer will at least have some inkling on what it does.
For that same reason, I have an issue with STI itself. Compared to other indexes, the STI comprise of Companies that are actually small on a global scale. Given that Singapore is a small market, there is not much room for the Companies in the STI index to grow much in capital appreciation compared to other indexes.
Compared to bigger countries such as the United States of America, being present there allows them to tap into much larger resources and customer base. There may come a time when all the Singapore companies are actually unable to compete with other Companies and start making significant losses across the industries due to competition. You can refer to the 2 charts below for comparison on their growth.
However I believe the time is not coming soon (unless Covid-19 is much worse than we thought). For now it will be stable, as there will be less risk and volatility to contend with, compared to if your portfolio is exposed to global markets.
A financial services heavy index
Included in the index mainly are those in the Banking Industries and Real Estate Investment Trusts at 60.91%. Refer to the breakdown below:
The STI Index is thus not as heavily diversified as it seems. Instead, if there are any major monetary policies, it may prove to be a significant upside or downside to the index and may not be a true reflection of the Singapore’s economy.
Buying into the STI requires investors to at least be aware and a reasonable level of understanding of the business in the banking and real estate industry.
In this aspect, I have faith that if the financials sectors are not performing well, a reasonable re-balancing may occur to replace them. It is worth noting however that in the reserve list, as of the time I am writing this, mainly comprise of Companies that are under the financial services as well.
Conclusion
For anyone looking to start their investing journey, investing in an index ETF is a good start just to have a feel of the market. You can pick a few Companies within the index to start learning about their businesses. From there, once we are able to build a foundation to analyze the information, we can move on to other businesses outside of the index.
More info in link below:
