Singapore ETF’s Track Index return of 1.8% in 1st week of January

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• In the ten years of 2002 through 2011, the STI gained 62%.
  
• The STI is a diversified Singapore Index benchmark that provides investment exposure to aspects of the Singapore economy such as Banking, Real Estate, Industrials, Oil & Gas and Telecommunications.
  
• With the SGX, Investors may choose from four ETFs that are based on the performance of Singapore indices. With these ETFs, investors can achieve broad asset diversification across the Singapore market in one single transaction with relatively low minimum investment requirements.

In the first week of 2012, the Straits Times Index (STI) rose 1.8%, with FTSE ST Indices revealing that all sectors posted gains.

Looking further back, over 2011, the STI declined 17.0%. This was a minor outperformance to the Asian Newly Industrialised NIE average at 17.3%. Among the four NIEs, South Korea fell 11%, Hong Kong fell 20%, Taiwan fell 21% and Singapore fell 17%.

Coinciding with the STI performance of 2011, economists observed a moderation in the economic growth of Singapore over the year. A recent Ministry of Trade and Industry (MTI) report (3 January) noted:

• In advance estimates, the Singapore economy grew by 3.6% on a year-on-year basis in 4Q11, compared to the 5.9% growth in 3Q11. For 2011, the economy was estimated to have expanded by 4.8%.
• Across the sectors “the moderation of growth in the fourth quarter was largely due to the slowdown in the manufacturing sector”. The contraction of the manufacturing sector more than reversed the expansion in the previous quarter. The construction sector continued to show some marginal growth amidst the decline in residential building activities. The services industries reversing its contraction in the preceding quarter which was mainly attributed to the wholesale and retail trade sector.

SGX Singapore Index ETFs

Singapore Exchange (SGX) currently offers four Exchange Traded Funds (ETFs) that provide investors access to either of the two key Singapore indices, the STI or MSCI Singapore Index (SiMSCI). The two indices have differences in terms of constituents, weightings and pricing levels. Both indices provide investor benchmarks to the corporate economy of Singapore.

Through the ETFs, investors can achieve broad diversification across the Singapore market in one single transaction with minimum investment of less than S$300. For example, when an investor buys the Nikko AM Singapore STI ETF with minimum investment of S$274 (price of $2.74 as at 6 Jan 2011 for minimum 100 units/ lot), one gains cost efficient exposure to a diversified portfolio of the top 30 stocks in Singapore by market capitalisation.

Utilising one of the popular investment strategies of “core-satellite approach”, investors can build a core Singapore market portfolio with an STI ETF through the above example at less than S$300 and add stock picks (satellite) for additional out-performance.

Source: SGX, as at 30 November 2011

Out of the above ETFs which provide investors easy exposure to the Singapore market, db x-trackers MSCI Singapore IM TRN Index ETF is a synthetic replication ETF while the others are direct replication or cash-based ETFs. To make it easier for investors to differentiate between cash-based and synthetic replication ETFs, SGX has arranged for the trading name of all synthetic replication ETFs to be tagged with the letter ‘X’.

Direct replication or cash-based ETFs invest in the basket of constituent stocks that the ETF is tracking. These ETFs hold the same stocks in the same proportion as the weights of the constituent stocks in the benchmark index.

Synthetic replication ETFs use swaps or other derivative instruments to replicate the index. Counterparty risk on the cash based ETFs is reduced as investing activity is in the actual basket of constituent stocks that the ETF is tracking against the benchmark index. For example, the assets of the Nikko AM Singapore STI ETF consists largely of the constituent stocks of the Straits Times Index. Cash based ETFs can however be associated with higher tracking errors, mainly due to the drag from expenses and tax withholdings on dividend payments that also depends on the complexity of benchmark index and the accessibility of the underlying market.

The price and value of all ETFs may go down as well as up and past performance does not guarantee of future returns.

As a comparative product class ETFs are commonly known as open ended investment funds that are listed and traded on an Exchange. Unlike traditional funds, ETF prices are readily accessible any time during trading hours via security brokers enhancing price transparency. There are also relatively low distribution expenses, no upfront sales fee and low annual management fee compared with Unit Trusts.