A Simple Guide To Sti Etf Investment

Investing in the Straits Times Index (STI) Exchange-Traded Fund (ETF) is a simple way to invest in Singapore's top 30 companies. The STI is an index of the largest and most liquid companies listed in Singapore, and the ETF tracks its performance. This means that by investing in an STI ETF, you get exposure to a range of companies within the ETF, without having to pick individual stocks. ETFs are traded on a stock exchange, so they can be bought and sold like stocks, and they usually have lower fees than other types of funds. There are two STI ETFs available in Singapore: the SPDR STI ETF and the Nikko AM STI ETF. To invest in an STI ETF, you can use a brokerage account or a monthly investment plan, and you can even use your Central Provident Fund (CPF) Ordinary Account.

What is an STI ETF?

The STI ETF is an Exchange-Traded Fund (ETF) which tracks the Straits Times Index (STI). The STI is an index consisting of the 30 largest and most liquid blue-chip companies listed in Singapore, across a range of industries and sectors. These companies include DBS Bank, CapitaLand Limited, and Singtel. The STI is used as a benchmark index for other funds to compare their performance against.

An ETF is an investment fund that tracks the performance of an underlying index, in this case, the STI. It is passively managed, meaning it buys into a range of companies based on the allocation determined by the index. ETFs are traded on a stock exchange, so they can be bought and sold like stocks, and they usually have lower management fees compared to mutual funds or unit trusts.

By investing in an STI ETF, investors can access a diversified portfolio of Singapore's top companies at a low cost. It is a straightforward way to invest in Singapore's economy and is suitable for passive investors who are new to investing. However, it is important to note that the STI ETF is subject to country concentration risk, as it is highly vulnerable to changes in Singapore's economic and political conditions.

There are two main STI ETFs available in Singapore: the SPDR STI ETF and the Nikko AM STI ETF. The SPDR STI ETF is older and larger, indicating that it is more popular and tracks the STI more accurately. The Nikko AM STI ETF has a larger tracking error, meaning it may underperform or outperform the STI.

How to buy STI ETFs

There are several ways to buy STI ETFs, which are a great way to invest in Singapore's top 30 companies without having to pick and choose individual stocks. Here are the steps you can take to buy STI ETFs:

Method 1: Lump-Sum Investment

To make a lump-sum investment in STI ETFs, follow these steps:

• Open a Central Depository (CDP) account and an online brokerage account.
• Log into your brokerage account.
• Ensure you have sufficient funds in your settlement account to pay for your trade.
• Select the STI ETF counter you want to purchase.
• Submit your trade along with your desired 'Buy' price.
• If your trade is successful, the cost of the STI ETF counter will be deducted from your settlement account, and the STI ETF stock counter will be allocated to your CDP account or custodian account.

Method 2: Monthly Investment via Regular Shares Savings Plan (RSSP)

If you prefer a more gradual approach, you can set up a Regular Shares Savings Plan (RSSP). This option does not require you to open a CDP account, as your bank will hold the stocks on your behalf. Here's how to get started:

• Choose one of the six financial institutions that offer RSSPs: DBS Bank Invest Saver, dollarDEX Regular Savings Plan, FSMOne Regular Savings Plan, OCBC Bank Blue Chip Investment Plan, PhillipCapital Share Builders Plan, or Saxo Regular Savings Plan.
• Log into your chosen RSSP account via iBanking or the financial institution's system.
• Select the amount you want to be deducted from your bank account each month.
• On a predetermined date each month, the RSSP will automatically purchase the STI ETF of your choice with your allocated funds.
• You will receive regular updates on your investments and dividends earned.

Additional Options:

• Using CPF to Invest in STI ETF: You can also consider using your CPF Ordinary Account to invest in STI ETFs through the CPF Investment Scheme (CPFIS). This option requires setting up a CPFIS scheme account with a local bank and linking it to your brokerage account.
• Brokerage Platforms: When buying STI ETFs, you can use brokerage platforms like Interactive Brokers or SAXO, which offer user-friendly interfaces and competitive commission fees for SGX ETFs.
• Robo-advisors: If you find setting up a brokerage account intimidating, you can explore robo-advisors like Stashaway, Endowus, or Syfe, which offer globally diversified portfolios that include ETFs.

Remember to do your own research and understand the risks and potential returns associated with any investment before committing your funds.

Pros and cons of investing in STI ETFs

Pros of Investing in STI ETFs

• It is a straightforward way to diversify your investment portfolio at a low cost.
• It is a good option for passive investors who are just starting their investment journey.
• It is a low-cost and easy investment.
• The Singapore financial sector has performed decently historically.
• There is no foreign currency risk.
• It is a good way to invest in your own country.
• It holds a portfolio of stocks representing the future economy of Singapore, including some of the country's most established companies, like DBS and SingTel.
• It pays dividends, with SPDR STI ETF having a dividend yield of 4.02% and Nikko AM STI ETF 4.27% in 2023.
• It is one of only four approved ETFs that can be invested under the CPF Investment Scheme (CPFIS).
• It is a safer approach than putting all your money into one stock.
• It is a good option for those who don't know how to pick stocks or are too lazy to do so.
• It is likely to beat CPF Ordinary Account interest in the long run.
• It is a way to invest in the future of Singapore.

Cons of Investing in STI ETFs

• It is not a conservative investment.
• It is volatile and overly concentrated in one industry.
• It has a volatile stock history, with price value drops that can be hard to stomach.
• It is a 100% equity investment, which is a high-stakes strategy where you can lose big.
• It has poor diversification, with 56.4% of STI companies being financials.
• It has a country concentration risk, with all stocks being Singapore-listed, making it highly sensitive to changes in Singapore's economic or political conditions.
• It may not fully mimic its underlying index in terms of price and returns, and there may be a tracking error.
• It may face thin volume and become harder for investors to buy or sell units.
• It may become illiquid, with the buy and sell price spread deviating from the Net Asset Value of the Fund.
• It requires fund management, and there is a risk of fraud or negligence.

How much to invest in STI ETFs

The Straits Times Index (STI) is an index of the top 30 companies listed in SGX (Singapore's Stock Exchange). It is a widely used indicator of the performance of the Singapore stock market.

An Exchange-Traded Fund (ETF) is an investment that tracks the performance of an underlying index. An STI ETF is an exchange-traded fund that tracks the Straits Times Index.

There are two main ways to invest in STI ETFs: a lump-sum investment or a monthly investment via a Regular Shares Savings Plan (RSSP).

Lump-Sum Investment

To invest in STI ETFs through a lump-sum investment, you will need to open a Central Depository (CDP) account and an online brokerage account. Once you have set up these accounts, you can log in to your brokerage account, ensure you have enough money in your settlement account, select the STI ETF counter you want to buy, and submit your trade along with your desired 'Buy' price. The cost of the STI ETF counter will be deducted from your settlement account, and the STI ETF stock counter will be allocated to your CDP account.

The brokerage commission market rate in Singapore is 0.28% with a minimum of S$25, excluding SGX fees and GST. Including fees and GST, this usually amounts to about S$28. You must invest in full-lot sizes, with one lot being equivalent to 10 units. Therefore, investing a small amount of money through these brokerages may not be worthwhile as the percentage cost may be too high.

Monthly Investment via Regular Shares Savings Plan (RSSP)

This option does not require you to open a CDP account, as your bank will hold the stocks on your behalf. There are six financial institutions that offer RSSPs: DBS Bank Invest Saver, dollarDEX Regular Savings Plan, FSMOne Regular Savings Plan, OCBC Bank Blue Chip Investment Plan, PhillipCapital Share Builders Plan, and Saxo Regular Savings Plan.

To set up an RSSP, log in to your chosen RSSP account, select the amount of money you would like to be deducted from your bank account each month, and the RSSP will automatically purchase the STI ETF of your choice with your allocated amount.

The amount you should invest in STI ETFs depends on your financial goals, risk tolerance, and investment strategy. Here are some factors to consider:

• Investment Capital: If you have a small investment capital, investing in an STI ETF can provide sufficient diversification. With a small capital, investing in individual stocks may concentrate your risk in a few companies, whereas an STI ETF allows you to invest in a basket of 30 companies.
• Knowledge and Interest in Stock Picking: If you do not have the knowledge or interest in picking individual stocks, an STI ETF can be a simpler way to invest in the stock market. It removes the need to research and choose specific companies to invest in.
• Risk Tolerance: STI ETFs are considered less volatile than investing in individual stocks, as they provide diversification across different industries. However, they still carry risks such as country concentration risk and price fluctuations.
• Investment Horizon: STI ETFs are generally considered a long-term investment. The SPDR STI ETF, for example, has been around since 2002, and its performance should be evaluated over the long term.
• Investment Goals: Consider your investment goals and whether an STI ETF aligns with them. If you are seeking higher returns, you may need to explore other investment options or actively pick your own stocks. If you are happy with a return of around 3-4% and prefer a passive investment approach, an STI ETF could be suitable.

In summary, the amount you invest in STI ETFs depends on your financial situation, risk appetite, and investment strategy. It is important to do your own research, understand the risks involved, and ensure that you have sufficient knowledge before investing.

Alternatives to investing in STI ETFs

Investing in the STI ETF is a straightforward way to diversify your investment portfolio at a low cost. However, there are several alternatives to investing in STI ETFs that you can consider. Here are some options:

Singapore Equities (Stock Picking)

Instead of investing in an STI ETF, you can opt for stock picking and choose to invest in individual Singapore equities. This approach allows you to select specific companies that align with your investment goals and risk tolerance. By conducting thorough research and analysis, you can identify companies with strong fundamentals and growth potential.

Regional Indexes

Another alternative is to broaden your investment horizons by exploring regional indexes such as the Hang Seng, ASX, or FTSE China. Diversifying into these indexes offers exposure to a wider range of companies and industries beyond Singapore. This strategy can help mitigate the country concentration risk associated with investing solely in the STI ETF.

Global Indexes

If you're seeking even greater diversification, consider investing in global indexes like the S&P 500, NASDAQ, or EURO STOXX 50. These indexes provide access to some of the largest and most established companies across various sectors worldwide. By investing in global indexes, you can benefit from the growth and stability of developed markets while also gaining exposure to innovative companies driving global trends.

Foreign Equities (Stock Picking)

Foreign equities present another avenue for diversification. By investing in individual stocks from other countries, you can tap into new markets and industries that may offer higher growth potential. Conduct due diligence to understand the risks and regulations associated with investing in foreign equities, as they can vary across different countries and regions.

Mutual Funds & ETFs

Mutual funds and ETFs (Exchange-Traded Funds) are investment vehicles that pool money from multiple investors to purchase a diversified portfolio of assets. They are managed by professional fund managers who actively select investments to maximize returns. Mutual funds and ETFs can provide access to a wide range of stocks, bonds, and other financial instruments, allowing you to diversify your portfolio beyond the STI ETF.

Investment-Linked Policies (ILPs)

Investment-Linked Policies (ILPs) are insurance plans that offer both insurance coverage and investment opportunities. With an ILP, a portion of your premium is allocated to life insurance coverage, while the remaining portion is invested in a range of investment funds. ILPs can provide a balanced approach to growing your wealth while also ensuring protection for you and your loved ones.

Real Estate

Investing in real estate offers a tangible asset class that can provide stable returns and potential for capital appreciation. You can consider purchasing investment properties, such as residential or commercial real estate, to generate rental income and benefit from long-term property value appreciation. Real estate investment trusts (REITs) are another option, allowing you to invest in a diversified portfolio of income-generating properties.

Precious Metals

Precious metals like gold, silver, and platinum have historically been viewed as safe-haven investments during economic downturns and periods of high inflation. Investing in physical bullion or precious metal-backed ETFs can provide a hedge against stock market volatility and help preserve your wealth.

Commodities

Commodities such as energy, agriculture, and industrial metals offer investment opportunities beyond traditional stocks and bonds. They can serve as a hedge against inflation and provide diversification benefits. You can invest in commodities through futures contracts, commodity-focused ETFs, or exchange-traded commodity funds.

Remember, when considering alternatives to STI ETFs, it's essential to conduct thorough research and carefully assess your investment goals, risk tolerance, and time horizon. Diversification is a key aspect of successful investing, so ensure that your portfolio aligns with your long-term financial strategy.

Frequently asked questions