Saturday, December 25, 2010

Investing in Singapore listed ETFs

ETFs is the acronym for exchange traded funds, which are basket of stocks traded over the exchange. Having invested nearly 0.5M in stocks I must agree that ETFs are not exciting products for people looking at supernormal returns. However, holding ETFs means sleeping better at night since I will probably not be losing my entire capital even during market crash.

Take the STI ETF for example. If I lose my entire capital invested, this would literally translate to DBS, UOB, OCBC, SIA, Singtel trading at zero dollars. For that to happen, I think putting money anywhere will mean total loss anyway.

Besides, STI ETF pays regular dividends as well. Historically, the dividends are about 4-6 cents per unit, which translates to miserable yield of 2%. Well, dont expect Singpost or SPH dividends payout if you are buying STI ETFs. People mainly buy it for capital appreciation.

The sales charge is equal to brokerage charges (0.2%), management fee of about 1% and thats it. No need to rebalance portfolio as fund manager does that for you, daily.

I have been through the Lehman crisis and its terrible to see my stock holdings bleed day after day. Fortunately, I was holding on to pure blue chips and that gave me conviction to hold. Dividends came in timely as I repurchase other even badly battered mid cap stocks that gave me more than 100% returns on hindsight.

Today as I looked back, I might not have fare much better if I invested in STI ETF. However, I definitely would have slept better during the crash in 2008. This is what portfolio theory explains: Invest according to risk tolerance and you will get an optimal portfolio that gives you the highest return based on your risk profile.

I want to blog more about ETFs as this is the next direction I am getting into. No more single large stock purchase, mainly diversified portfolio in different regions.

In Singapore, we can access to the worlds markets just by buying ETFs and paying the minimum brokerage of 0.2%. However for a start, I would like to constrain myself to buy plain vanilla ETFs instead of exotic new generation ETFs.

From SGX website:

Plain vanilla ETFs (as I termed it) are cash based ETFs that adopt either full replication methodology or representing sampling methodology

Full replication methodology

The ETF holds the same stocks in the same proportion as the weights of the constituent stocks in the benchmark index.

Representative sample methodology

The ETF holds a selected number of constituents stocks of the underlying index according to their degree of historical correlation with such index. In other words, the ETF holds a sample of constituent securities that statistically represents the index.

In other words, my invested captial is backed by shares of companies as underlying assets.