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Showing posts with label ETF. Show all posts

I have wrote about the ETF a couple of times. Recently, I came across a video on Facebook by SGX introducing STI ETF (Please watch the video below). Well done, SGX! I personally liked the video. It gives a good introduction and a baseline understanding of STI ETF.

I've long been a proponent of the STI ETF. Please read some of my earlier articles:

1. Exchange Traded Funds - Simplified

2. STI ETF Is A Simple Way To Profit

3. Dollar Cost Averaging The Index ETF

4. What If The STI Goes Down 5% Every Month For A Year?

I have been asked by a few readers, new to investing, on what should they do or what should they invest in or how do they get started?

If I could go back in time and give myself advise, I would tell my 23-year-old self to start investing in STI ETF and dollar cost average my STI ETF investment.

So to Mark Tan who has asked me what should he do with his S$10,000 savings; I think you should considered investing in the STI ETF.

Invest in STI ETF monthly

Again, my advise to myself would be the following 5-years plan to kick-start my investing journey (who has S$10,000 to begin with):

23-year-old self

Savings: S$10,000

Continue to save: S$250 monthly (not a very big amount and I believe most should be able to save this amount or more)

Continue to save all my bonuses - to build my emergency / war chest fund.

Not to spend extravagantly (I doubt anyone would listen to that advise)

Invest: S$400 monthly on STI ETF

The next 5 years would look something like that:

This is just a hypothetical example. There will be interest earned in the savings account. In addition, STI ETF will be distributing dividends as well. The market value of the STI ETF might be higher than the S$24,000 invested. Or it might be lower. Whichever the case, the point is I will have started my investing journey with S$24,00 invested.

So for those who do not have S$10,000 to start their journey? It doesn't matter. Start with a Regular Savings Plan.

Regular Savings Plan

There are a few Regular Savings Plan options that allows you to invest via a GIRO arrangement on a monthly basis. One is POSB Invest-Saver and the other is OCBC Blue Chip Investment Plan. Please take a closer look at the fees and charges. For those with lesser discipline, this is the best option.

Conclusion

I am not advertising for POSB or OCBC. I have been using the OCBC Blue Chip Investment Plan to invest in the STI ETF for my SRS account. Investing earlier or just starting this journey is my key advise to myself if I could go back in time.

The Straits Times Index (STI) has underwent a major correction of at least 15% in the last 4 weeks. A lot of investors and stock holders in the local market are definitely feeling the pain. This includes myself. My gains over the last 1.5 years were all gone in the last 4 weeks.

I have been buying the STI ETF since Aug 2013. I have invested about S$26,800 from my Supplementary Retirement Scheme (SRS) account using the OCBC Blue Chip Investment Plan to purchase the ETF on a monthly basis accumulating close to 8000 shares of Nikko AM STI ETF. With the recently major correction, I am down slightly more than 9%.

Read: Topping up SRS Account For The 3rd Consecutive Year

So what if the STI really goes down at 5% every month for a year? The Nikko AM STI ETF is designed to mimic the STI. Therefore, if the STI carries on to fall, so will the price of Nikko AM STI ETF.

Read:
Exchange Traded Funds - Simplified
STI ETF is a Simple Way to Profit

As of yesterday, 21 August 2015, the STI ended at 2,971.01 points. The Nikko AM STI ETF ended the week at S$3.05.

In the next few years, I believe I will not stop purchasing the ETF through the OCBC Blue Chip Investment Plan. The plan is to constantly use S$1,4000 monthly to purchase ETFs and average the price. I wonder what my portfolio of STI ETF will look like in 12 months if the STI carries on its downtrend.

Just looking at the calculation, after investing another S$16,800 (S$1,400 *12), the project market value will still be approximately the same as my current market value with the 7,971 shares I have. I would have accumulated more shares and slightly higher dividend payout.

I just have to stay calm. Time is on my side.

We can never time the market. When will the next bull run be? Will the STI reach 5,000 points in the future. Or will it really drop to 1,500 points? Since buying the ETF is something I am doing for the long run, I should not be too bother with the price now.

Fingers crossed. Hoping for a slight correction only.

Read: Dollar Cost Averaging the Index ETF

In one of my previous entry, STI ETF is a Simple Way to Profit, I mentioned that I would prefer to do Dollar Cost Averaging on the Straits Times Index (STI) Exchange Traded Fund (ETF) based on the current level of the STI. The STI is currently trading at 3,337 points after the low of 2,953 points in the first quarter of 2014.

I personally feel that Dollar Cost Averaging is a simple-to-execute strategy and is safer than just 'buying and holding'. So how should we execute this plan?

Invest a Fixed Amount in a Stipulated Period

For example, you can invest a fixed amount of S$1,200 every month into SPDR® Straits Times Index (STI) ETF (ES3). Or you could invest a fixed amount of S$6,000 every quarterly. It can also be investing annually. Once you have worked out the amount you feel comfortable investing and sustaining, fix a stipulated period. It can be the first trading day of every month or the first trading day at the start of each quarter (January, April, July, October).

Consistently Investing the same Amount of Money at the same Regular Interval

No matter what happens to the Index, you consistently invest the same amount of money at the same regular interval. When the ETF price is at S$3.00, your S$6,000 will buy you 2 lots (2,000 shares). Likewise, when the ETF price is at S$1.00, your S$6,000 will buy you 6 lots (6,000 shares). This means you will be buying more shares when the ETF price is low and fewer shares when the ETF price is high.

Takes Away the Emotion from Investing

No matter what happens to the index (whether its goes up or down), you will be investing at your stipulated period. This takes away the emotion in investing in the ETF or even timing the ETF. You just have to stick to your plan for a long term and basically treat it as paying for your "Retirement Fund".

Hypothetical Scenario - 6 Years and Counting STI ETF Plan ...

I was browsing the historical prices of ES3 on Yahoo! Finance. Decided to do some maths on a plan based on a S$20,000 every semi-annually (start of April and October) investment. For simplicity, the cost of transactions will not be calculated. See the table below.

The ES3 (SPDR® STI ETF) has a board lot size of 1,000 units. Therefore, at S$3.13 on 1st April 2008, a lot of 1,000 ES3 shares will cost S$3,130 and the maximum number of lots you will be able to purchase is 6 (S$20,000 / S$3,130 = 6.39).

In the Dollar Cost Averaging strategy, you will consistently invest the same amount of money at the same regular interval. From this simple plan, you would have acquired 86,000 shares and invested a total of S$243,000 over 6 years. Based on the current price of ES3, S$3.37, your total investment will be worth S$289,820 now. That is an unrealized paper gain of S$46,820. We have not factored the dividends collected.

Just for the record, based on the accumulated 86,000 ES3 shares, the dividends collected in April 2014 will be S$3,698.

Does Dollar Cost Averaging Method beat the Buy-And-Hold Method?

The Dollar Cost Averaging method does not always outperform the Buy-And-Hold method. For the Buy-And-Hold method, it really depends on the price you purchase the ETF for. Nevertheless, the Dollar Cost Averaging method prevents you from buying the Index ETF at an all-time high point, only to see the value of your investment reduce when the prices fall drastically.

Start Small, Start Early ...

If you are planning an investment for the long term, Dollar Cost Averaging the Index ETF is a viable option. You can start early by investing S$300 every month for the next 30 years. You should do the maths and see if this investment will grow to a decent amount.

The cost of commission and brokerage fee has to be considered when you plan your stipulated interval for Dollar Cost Average. To keep it simple, you generally make more money if your fees are lower. I will highlight some alternatives in keeping your transaction cost low in another entry.

The key message is to start early.

Read:
1. Exchange Traded Funds - Simplified
2. 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."

- Extracted from The Motley Fool,

STI ETF generated 8.4% annualized returns over past 10 years - dated 25 March 2014

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.

Screenshot of SPDR STI ETF Factsheet - dated 28 Aug 2014

Screenshot of NIKKO AM Singapore STI ETF Factsheet - dated 28 Aug 2014

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?

No one can predict how the Singapore Market will be like in 5/10 years time. Will it go up to 5,000 points or drop to 2,000 points? Will there be another Great Financial Crisis?

Let us just take a look how the STI has traded over the last 5 years:

Screenshot from Yahoo Finance - https://sg.finance.yahoo.com/q/bc?s=%5ESTI&t=5y&l=on&z=l&q=l&c=
- dated 27 Aug 2014

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

What exactly is an Exchange Traded Fund (ETF)?

According to Investopedia's definition, an ETF is a security that tracks an index, a commodity or a basket of assets like an index fund but trades like a stock on an exchange.

To simplify:

1. ETFs are basically mutual funds that trade like stocks on an stock exchange.

2. ETF tracks a particular index. There are ETFs that track Singapore or Foreign stock/bond indexes.

3. Unlike mutual funds, which are priced only once at the close of business by the fund company based on the value of the securities owned by the fund, ETFs are priced continuously throughout the day.

Still do not understand? I will use a Singapore Index ETF as an example to explain.

Straits Times Index Exchange Traded Fund

Screenshot from www.sgx.com - dated 27 Aug 2014

People are more familiar and often see the Straits Times Index (STI) being reported on the news. The STI shows the performance of the Singapore stock market. As I am writing, the STI is up 0.36% and is at approximately 3334 points (see left). The STI comprises the top 30 stocks listed on the Singapore Stock Exchanged (ranked by market capitalization) as shown below:

Screenshot from Yahoo Finance - dated 27 Aug 2014 - https://sg.finance.yahoo.com/q/cp?s=%5ESTI

There are two ETFs that track the STI in the Singapore Stock Exchange - SPDR® STI ETF (ES3) and NIKKO AM Singapore STI ETF (G3B). The SPDR® STI ETF has been listed since April 2002 and the NIKKO AM Singapore STI ETF has been listed since February 2009.

The STI is currently trading at approximately 3,334 points and the respectively ETF is trading at S$3.37 (SPDR® STI ETF - https://sg.finance.yahoo.com/q?s=ES3.SI - dated 27 Aug 2014) and S$3.42 (NIKKO AM Singapore STI ETF - https://sg.finance.yahoo.com/q?s=G3B.SI&ql=0 - dated 27 Aug 2014).

SPDR® STI ETF and NIKKO AM Singapore STI ETF are Designed to Mimic the STI

These mentioned ETFs are designed to mimic the STI. If the STI has a bull run and rises to 4,000 points, both mentioned ETFs will be traded at approximately S$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.

Why the discrepancy in price between the mentioned ETFs?

In all ETFs, there is always a tracking error. A tracking error tells us how much an ETF would deviate from the index's performance. A high tracking error may result in an erosion of index's gain by the ETF.

Owning an STI ETF is like owning 30 Different Stocks

By owning units of an ETF that tracks the STI, you are basically owning 30 different stocks as mentioned above. On top of getting the diversification, you are able to purchase as little as one lot to gain exposure to the Singapore market. You gain the same exposure without having to spend more money buying the component stock of the STI. Can you imagine owning just one lot of every stock in the STI? S$17,950 for just one lot of DBS shares.

But with ETFs...

The two ETFs have different board sizes - 1,000 shares for SPDR® STI ETF and 100 shares for NIKKO AM Singapore STI ETF. At the current price of S$3.37, the minimum investment in SPDR® STI ETF will be S$3,370. At the current price of S$3.42, the minimum investment in the NIKKO AM Singapore STI ETF will be S$342. Both the minimum investment excludes the broker commission and transaction fee.

To Summarize...

1. There are various ETFs - different types of ETF that tracks Stock or Bond or Commodity Index.

2. ETF's objective is to mimic a specific Index.

3. ETFs are traded on a stock exchange, you can buy and sell units of ETFs throughout the trading day.

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For Beginners, Invest in STI ETF

What if the STI goes down 5% every month for a year?

Dollar Cost Averaging the Index ETF

STI ETF is a Simple Way to Profit

Exchange Traded Funds - Simplified