STI ETF is a Simple Way to Profit

Buying an Exchanged Traded Fund (ETF) is just like buying any stock in the Stock Exchange. As such, there is a capital gain when the prices of the ETF rises above the purchased price. Some ETFs, like the SPDR® Straits Times Index (STI) ETF (ES3) and NIKKO AM Singapore STI ETF (G3B), also pay dividends. Again, I will use the STI ETF to explain how good an investment it is.

So how good an investment is an STI ETF?

In my previous post, Exchange Traded Funds - Simplified, I highlighted that the ETF's objective is to mimic a specific Index:

"If the STI has a bull run and rises to 4,000 points, both mentioned ETFs will be traded at approximately SS$4,00. Likewise, if the STI has a bad run and drops to 2,000 points, both mentioned ETFs will be traded at approximately S$2.00."

Performance of STI ETF simply relates to Straits Times Index

As such, the returns of the STI ETF will definitely be similar to the STI. According to an article in Motley Fool, the STI, over the 10 year period ending February 2014, has generated a 64.7% price return without dividends. 

"Over the ten year period ending February 2014, the STI generated a 64.7% price return without dividends. This meant that before dividends the annualized price return of the Index over the 10 year period was 5.1%.

..., the SPDR® STI ETF has been available to investors since 2002. Without out dividends, over the ten years ending Feb 2014 the SPDR® STI ETF gained 63.9% in Net Asset Value. Including dividends, the 10 year return came to 123.56%. This meant that over the past 10 years, with dividends included, the SPDR® STI ETF returned 8.4% on an annualized basis."

Performance of SPDR® STI ETF and NIKKO AM Singapore STI ETF

Based on factsheets (below) of both SPDR® STI ETF and NIKKO AM Singapore STI ETF, the returns ranges from 7-9% over a period of 5 years.

These are all just historic returns. So what will be the return of STI in 2015? I will not know and I believe no Investment Analyst will be accurate as well. But what about the return of STI in the next 10/20 years? I can safely say it would probably be ranging from 7-9% over the long term.

The Best Time to Buy an STI ETF?

Prior to 2010, STI was trading below 2,600 points. In 2011, the STI traded above 3,200 points before falling back to 2,600 points. 

If you have bought 10 lots of SPDR® STI ETF at $2.60+ (when STI was trading at around 2,600 points), you would have invested about S$26,000. At this current point, your investment will be around S$34,000. That is a 30% profit over a span of 3-5 years depending time of purchase. That easy? No! 

Looking at historic data, it is always easy to predict when you should have invested. So should you invest in the STI ETF now? Over the long term (10-30 year period), the STI has always trend higher over time. From this perspective, if you adopt a Buy-and-Hold-Forever approach, you should be able to achieve long-term returns. However, at current level of the STI, I am not sure if it will go higher in the short term. There might be uncertainties and you might have to sit on unrealized losses for months or years during bad periods. I would rather recommend a Dollar-Cost-Averaging (DCA) approach that I personally feel is safer. The DCA approach involves buying a fixed dollar amount of STI ETF at regular interval (monthly, quarterly, annually etc) regardless of price.

I believe there is no best time to buy the STI ETF. Just Buy, and Keep Buying, and Keep Buying and Hold for a long period of time.

Read: Exchange Traded Funds - Simplified