Asked on 30 Apr 2019
Recently chanced upon this article about the STI-ETF claiming it's a bad passive investment. Is it true? What should we do if we have already gotten the STI-ETF? And for those that have yet to invest in it, should we dive into it?
STI is made up of Singapore's top 30 largest market capitalisation companies. And as what the article depicted, top 5 counters (3 of which are banks) constitute 50% towards the value of STI.
You can find the constituents of STI Index here
Hence it is rather skewed in a way and not an actual representation of the entire Singapore's market as opposed to other markets which has a relatively good mix of industries tapping on various sectors etc.
Is it a bad strategy? Not necessarily.
S&P 500 rose 17% YTD
STI rose 11.9% YTD
Calculating the beta of STI (with S&P as the main market index), STI's beta is 0.69.
In good times, S&P 500 moves up by $1, STI would move up $0.69. However, if S&P 500 falls by $1, STI would only fall by $0.69.
With risk comes reward, vice versa.
4 more comments
08 May 2019
I read the article but wasnt as shocked as what u are protraying from the phrasing of your question. STI is concentrated in sg among the top 30 companies, which means diversification, but low compared to like S&P. I read somewhere that about 50% of STI is controlled by 5companies (but dont quote me haha i forgotten my source).
Nonetheless, STI is still possible for those who just started investing, because it is so simple to invest in STI with a DBS/POSB account, and you get dividends from it. Long term wise, you are probably looking for a peace of mind knowing it wont collaspe, good for ppl who find it difficult to sleep on volality, because STI should be a set up and forgot option.
Of course, for those who reads up on investing and have our hands in it, then we can move on to other instruments and alternatives, deciding which etfs/funds/stocks to pick based on our individual criteria.
I actually felt the same before IM65 wrote that post.
Add on is that though over the years if STI vs STI has growth , but rather mundane. When we do STI vs S&P500, STI looks rather pale and way less growth.
So to each his own. I wouldn't recommend going long term on STI, especially IM65 has proven it in the above articles.
Capital gains should not be the sole indicator to determine a sound investment decision. There are numerous factors that one should consider before investing (in STI), namely your risk appetite, portfolio-type, and investment horizon. For example, if 90% of your portfolio is made out of US equities, it might be a good idea to add some G3B/ES3 into your portfolio to increase diversification into different markets. Perhaps, you might be losing out on some potential gains. However, the upside (+security) might override the "missed opportunities".
In a few words:
Good investment decision =/= maximum amount of capital gains (even if these gains are "safe")
It's a highly concentrated equity fund with lots of geographic and sector risk.
There are better markets to track, especially in countries that have a better future outlook.
Our top companies don't innovate much as well and are big defencive incumbents.
If you are looking for growth, look elsewhere. The US and China market are so much larger and provide better opportunities for growth.
Personnally, I allocate 2.5% of my portfolio to STI ETF. At the end of day, need to have some skin in the game in my home country.
For at least the last 10 years, YES, an underperformer (however nobody can know the future), maybe S-REIT ETFs are a better way to invest into Singapore equity
It's not a great investment strategy for the following reasons
1) Serious lack of diversification
2) Huge opportunity costs, even relative to if you want to invest strictly in indices only https://www.moneymaverickofficial.com/post/why-you-should-invest-aggressively-now-and-how-you-still-can-have-peace-of-mind
3) Low yields
4) High risk for the yield that you're getting (low risk-return ratio, even though the beta isn't very high - the yield is even lower).
There are some common reasons why people stiil insist on the STI ETF or tout it as a good investment (or worse, a safe investment) - to look at it objectively.
1) Lack of Forex Risk, which is common with better performing indices
2) Lack of withholding tax
3) Low costs
4) Local market exposure with companies whose information is readily available and whose services you utilize (which creates a sense of security and generally decreases the odds that the stock will plunge horribly, being a consumer)
5) Convenient investment instrument - in relation to both accessibility (how you can invest and how quickly) and liquidity (how quickly you can sell your shares if required).
I'd advise people to aim higher because you can, which I can help with - but it's not a horrible investment strategy, I just wouldn't go as far as saying its a good one.
You can always drop me a PM if you'd like exposure to instruments that are both safer and higher yielding.