A Beginner's Guide To Investing In Singapore's Etfs

Exchange-Traded Funds (ETFs) are a great way for beginners to start investing. They are one of the safest and least volatile forms of investment, offering more returns than a typical savings account. In Singapore, there are about 70 ETFs listed on the Singapore Exchange (SGX). This article will provide a comprehensive guide to investing in ETFs in the country, covering topics such as the benefits of ETFs, popular ETFs in Singapore, and the different ways to start investing.

Choosing the right ETF

There are a few things to consider when choosing the right ETF to invest in. With over 4,000 ETFs globally and about 70 Exchange Traded Funds (ETFs) listed on the Singapore Exchange (SGX), it can be challenging to narrow down your options. Here are some factors to help you make an informed decision:

Evaluate the market:

Consider the potential economic changes and their impact on various industries. This will help you understand the broader market trends and make a more informed decision about which ETF aligns with your investment goals.

Assess your investment portfolio:

Take a close look at your current investment portfolio and reflect on the type of investor you are. Consider how adding a particular ETF will affect your overall portfolio. Are you diversifying your investments adequately, or are you overly exposed to a specific sector or asset class?

Evaluate the index and ETF:

Ask yourself several key questions about the ETF you're considering:

• What is the ETF tracking?
• What is the investment objective of this ETF?
• How frequently does the ETF report its holdings?
• What are the holdings and weightings of the ETF?

Consider additional factors:

In addition to the above, you can evaluate an ETF by examining other factors such as the expense ratio, liquidity, tracking error, and bid-ask spread. These factors will provide further insights into the potential risks and returns associated with the ETF.

Local vs. Global ETFs:

Another consideration is whether to invest in local or global ETFs. Local ETFs, like the Straits Times Index (STI) ETF, offer exposure to the top companies within Singapore. On the other hand, global ETFs provide international diversification and access to companies in other countries, such as the Vanguard VOO ETF, which tracks the S&P 500 in the US.

Popular ETFs in Singapore:

To help narrow down your options, here are some of the most popular ETFs in Singapore:

• SPDR STI ETF (SGX: ES3): Tracks the performance of the Straits Times Index (STI), comprising the top 30 companies on the SGX.
• Nikko AM STI ETF (SGX: G3B): Also tracks the STI but has a larger tracking error, which means it may underperform or outperform the index.
• Lion-Phillip S-REIT ETF: Invests in high-dividend Singapore Real Estate Investment Trusts (REITs).
• ABF Singapore Bond Index Fund: Provides exposure to highly-rated government and quasi-government bonds in Singapore.
• SPDR Gold Shares ETF: Invests in gold, offering a "safe haven" investment option.

Remember, choosing the right ETF depends on your investment goals, risk tolerance, and the level of diversification you seek. Conduct thorough research, consider seeking professional advice, and remember that investing carries inherent risks.

Local vs global ETFs

When considering investing in ETFs in Singapore, one of the key decisions you'll need to make is whether to opt for local or global ETFs. Here's a detailed comparison to help you understand the differences, benefits, and risks associated with each type:

Local ETFs

Local ETFs, such as the Straits Times Index (STI) ETF in Singapore, primarily invest in a basket of securities listed on the country's primary stock exchange. This provides investors with a sense of familiarity and comfort, as they can easily understand and monitor the performance of well-known domestic companies or sectors. Local ETFs also offer reduced costs compared to global ETFs, with lower management and trading fees. For example, investors are typically exempt from dividend tax when investing in local ETFs. Additionally, local ETFs provide currency stability, benefiting from the robust economic fundamentals and monetary policies of the home country.

However, one of the main drawbacks of local ETFs is the lack of diversification. By focusing solely on the domestic market, local ETFs may limit access to high-growth sectors like AI or renewable energy, which are booming in the global market. This could result in missed opportunities for rapid advancements and diversification benefits. Local ETFs also have limited growth potential due to their narrow focus on a single economy or sector, making them more susceptible to downturns in specific sectors and localized markets.

Global ETFs

Global ETFs, on the other hand, offer investors access to a diverse range of assets across different countries and regions. They provide exposure to international equities, bonds, and commodities, tracking the performance of prominent indices such as the S&P 500, MSCI World Index, and sector-specific indices. Global ETFs are ideal for investors seeking broad market exposure and unparalleled diversification across geographies and sectors. This diversification helps to reduce country-specific risks and balance potential losses with gains.

Global ETFs also open the door to high-growth sectors and markets that may be absent in the local context, such as the booming new energy industry and tech giants like Tesla and NVIDIA. These ETFs have high liquidity due to their broad appeal to global investors and markets. The high liquidity enables investors to enter and exit positions easily with smaller bid-ask spreads.

However, global ETFs come with their own set of risks and challenges. Global investments entail international risks, including fluctuations in currency exchange rates, geopolitical instability, and complex tax implications such as capital gains tax and dividend tax. Global ETFs also require a sophisticated understanding of various market dynamics and economic indicators, as investors must analyze multiple economic and geopolitical factors that can influence the ETF's performance.

The decision between local and global ETFs depends on your investment goals, risk appetite, diversification needs, market insights, and currency considerations. Local ETFs offer stability, familiarity, and lower costs, while global ETFs provide access to a wider range of growth opportunities and unparalleled diversification. A well-balanced investment portfolio may include a strategic allocation of both local and global ETFs to maximize returns while managing risks effectively.

How to start buying ETFs

Exchange-Traded Funds (ETFs) are a form of investment that tracks the performance of an underlying index, such as stocks in country indexes, stocks in a particular sector, bonds, commodities, or other financial instruments. ETFs are a logical first step for new investors as they are one of the safest and least volatile forms of investment.

To start buying ETFs in Singapore, you will need to follow these steps:

Open a Central Depository/Brokerage Account:

Before investing in ETFs, it is recommended to open a Central Depository (CDP) account and a brokerage account. This will allow you to purchase ETFs, which are traded on the stock exchange, just like any stock.

Evaluate the Market:

Consider the potential economic changes and their impact on various industries. Understand the possible risks and how they may affect your investment portfolio.

Choose the Right ETF:

With thousands of ETFs available globally, selecting the right one is crucial. Evaluate the ETF by considering factors such as the expense ratio, liquidity, tracking error, and bid-ask spread. You can also assess the investment objective, underlying index, reporting frequency, and holdings of the ETF.

Decide on Investment Approach:

Determine whether you want to invest via lump-sum investing or dollar-cost averaging. Lump-sum investing involves investing a larger amount at once, while dollar-cost averaging involves investing smaller amounts regularly.

Choose a Brokerage Platform:

Select a user-friendly brokerage platform with low commission fees, such as Interactive Brokers or SAXO. These platforms offer low minimum account funding requirements, allowing you to start with a small investment and build your confidence.

Alternative Options:

If you prefer a more hands-off approach, consider a regular savings plan offered by banks like DBS or OCBC. These plans allow you to set up recurring contributions, starting at $100/month, without the need for a separate brokerage account.

Popular ETFs in Singapore

When choosing an ETF to invest in, it is essential to consider your investment goals and risk tolerance. Here are some popular ETFs in Singapore:

• SPDR STI ETF (SGX: ES3): Tracks the Straits Times Index (STI), comprising the top 30 companies in Singapore.
• Nikko AM STI ETF (SGX: G3B): Also tracks the STI but has a larger tracking error, allowing for potential outperformance or underperformance.
• Lion-Phillip S-REIT ETF: Invests in high-dividend Singapore Real Estate Investment Trusts (REITs).
• ABF Singapore Bond Index Fund (SGX: A35): Provides access to Singapore government and quasi-government bonds.
• SPDR Gold Shares ETF (SGX: O87): Invests in gold, offering a "safe haven" investment option.

Remember, investing in ETFs provides instant diversification, but it is important to conduct your own research and evaluate your investment strategy based on your financial goals and risk tolerance.

Lump-sum vs dollar-cost averaging

When it comes to investing in ETFs, there are two main approaches to consider: lump-sum investing and dollar-cost averaging (DCA). Both strategies have their own advantages and disadvantages, and the right choice depends on various factors, including your financial goals, risk tolerance, and personal preferences.

Lump-sum investing involves putting a relatively large amount of money into the market all at once. The main advantage of this approach is the potential for higher long-term returns. By investing a large sum upfront, you benefit from immediate market exposure and can take advantage of bullish markets to maximise your gains. Historical data also suggests that stocks and bonds tend to outperform cash investments over time. Additionally, lump-sum investing may result in lower fees due to fewer transactions. However, one of the main drawbacks of lump-sum investing is the higher risk involved. There is a possibility of investing before a market dip, exposing yourself to short-term risks and losses. It also requires more starting capital and effort to monitor market movements.

On the other hand, dollar-cost averaging is a more conservative approach where you invest a fixed amount of money into the market at regular intervals, such as monthly or quarterly. This strategy helps mitigate the risk of investing a large sum all at once and is particularly useful if you are concerned about market downturns. By investing regularly, you can take advantage of market volatility, buying more shares when prices are low and fewer when prices are high. DCA is also more accessible for beginners as it requires less starting capital and helps instil discipline in saving and investing. However, one of the main drawbacks of DCA is the potential for slower portfolio growth. By spreading out your investments, you may miss out on the gains that could come from investing a large sum upfront. Additionally, DCA can result in higher transaction costs due to multiple investments over time.

In terms of which strategy is better for investing in ETFs in Singapore, there is no one-size-fits-all answer. If you are focused on maximising investment performance and have a substantial amount of capital available, lump-sum investing may be more suitable. However, if you are a beginner investor, prefer a more conservative approach, or want to automate your investments, DCA could be a better option. Ultimately, the choice between lump-sum investing and DCA depends on your individual circumstances, risk tolerance, and financial goals.

Brokerage accounts

To start investing in ETFs in Singapore, you will need to open a brokerage account. This is a trading account with a local brokerage firm.

There are several brokerage firms to choose from, including Interactive Brokers, SAXO, and Philip Capital. Interactive Brokers and SAXO are recommended for their user-friendly interfaces and low commission fees for SGX ETFs. You can fund your account with just S$1, so you can start small and build your confidence.

If you are new to investing, you may prefer to open a Regular Savings Plan with a local bank, such as DBS, OCBC, or UOB. This is a subscription plan to your investment of choice, and you can start with a recurring contribution of at least S$100 per month. The bank will do the rest.

If you already have a brokerage account, you can purchase an ETF just like you would a stock.

Frequently asked questions