Why invest in STI ETF ? Since the STI ETF tracks the Straits Times Index, we can take a look at the historical performance of the STI. STI is a benchmark that tracks the performance of stocks in Singapore generally. The picture below which is taken from fundsupermart, shows the historical performance of STI from 1985 up to 2008. The numbers in the picture indicate the onset of bear markets.
From a region of around 700 points in 1985, it managed to touch a high of around 3800 in 2007. The important point to take note is that STI always rise in the long run as seen from the picture above. Between this period of 1985 and 2007, Singapore has faced periods of economic turmoil such as the recession in 1985 and the Asian Financial Crisis in 1997. Yet STI is still able to rise throughout these years. Since the STI ETF tracks the STI, it is likely that the STI ETF is able generate positive returns in the long run.
A study was done by La papillion, an investor who blogs at bullythebear.blogspot.com. His analysis can be found here. The key findings from his analysis is that on average, STI will give a returns of around 7% in the long run and that excludes dividends. If one includes dividends, the returns is likely to be slightly higher. This return of around 7% is more than the Singapore Government Bonds, which only offer around 4% for long term bonds and definitely more than the interest rate being offered in the CPF accounts.
STI ETF also gives out dividends. Currently it distribute dividends twice in January and July every year. The dividends for the previous years can be found on the SGX website here.
As a conclusion, STI ETF will be appropriate as a form of investment for anyone has the intention to hold this investment for a long time. The returns offered by the STI ETF is likely to outperform other similar form of investments in the long run.
I will be doing a comparison between ETF and unit trust as a form of investment in my subsequent posts.
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I am interested in investing in STI ETF for its regular payment of dividends. However, with the recent failures of renowned and long established companies like Lehman Bros in mind, I don't know whether holders of STI ETF will be affected if say the issuer or manager defaults and is bankrupt or insolvent. Or are there other similarly severe incidents which will adversely affect STI ETF holders?
ReplyDeleteAlso, view the manager is not actively managing the ETF, what happens if say a component company of STI offers rights issue or scrips reinvestment scheme. Will the manager invariably decline such opportunities?
Your advice on the above will be greatly appreciated
Sincerely,
John
Hi Kay,
ReplyDeleteI'm totally new to stock/ETF.
At sgx.com DBS STI buy/sell price (Mar 2) was 1.560 & 1.680 respectively.
Does that mean I can buy at 1.56 and sell it as 1.68 (instant gain) ??
brgds,
Luke
Hi John,
ReplyDeleteTo my understanding, according to the prospectus, in the event that the Manager ceases to carry on business, basically the trustee will take over the fund and will return to its unitholders the proportional amount of shares which they own in the fund or the equivalent amount of cash or a combination of both. This is a summary of what I have read in the prospectus. If you wish to understand more, it will be good to read the prospectus.
There are many other events which are too numerous for me to list out here and these events can result in the closure of this fund. You can refer to pg 27 of the prospectus. Some of the events include the removal of the manager, the value of the fund dropping below $100 million, the fund ceasing to be listed on SGX and so on.
With regards to the rights issue or scrips reinvestment scheme, I can't seem to find any information regarding in the prospectus unfortunately.
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ReplyDeleteHi Luke,
ReplyDeleteUsually the selling price is higher than the buying price. It means that the seller wish to sell their stock at 1.68 and the buyer wish to buy their stock at 1.56.
If you wish to buy the stock, you will have to pay 1.68 since it is the lowest price which the sellers are willing to sell you their stocks. After buying the stock at 1.68, you can only sell the stock at 1.56 since it is the highest price that the buyers are willing to offer. Thus you can't make any profits actually.
Usually, the difference between the buying and selling price, which is also known as the spread is very close to each other i.e. A difference of $0.01 or $0.02 between the buying and selling price. The reason why you are seeing such a large spread is due to the matching of orders done by SGX during the closing period of the day.
Hi Kay,
ReplyDeleteThanks for your prompt response. I have read Cl.27 of the Prospectus and am now aware of all the circumstances that the Trust may be terminated.
My main concern is for a guesstimate of loss by holders when the Trust is terminated due to bankruptcy or mismanagement of the Manager. Will it be a substantial loss say 70% or more? If it is say 10% or less then I can live with it. Reckon one way to know this is to dig out similar ETF's that have failed; do you know any that have gone bankrupted, etc, or how can I source for such information?
Hi John,
ReplyDeleteIt would be hard for me to say what will the losses be like if the Trust is terminated. In general, under the audited statement, unit holders will be able to get back the assets that is attributed to them. You can refer to the balance sheet under the latest audited financial statement.
In my humble opinion, the losses would mainly stem from the difference between the average liquidation price of the Trust and your average buying price of the Trust since it is rather clear that under the financial statement, close to 98% of the total assets in the Trust is attributed to the unit holders.
For example, let's say you bought the STI ETF at $2.50. Due to some situations which we discussed in the previous comments, the trust was terminated at a time when the NAV of the STI ETF is around $2.00. Assuming that the trustee carries out liquidation of the Trust, it is likely you will get back slightly less than $2.00 for every share you own since the NAV of the STI ETF is around $2.00 at the point of liquidation. Do bear in mind that this situation is a hypothetical one. The possible situations that will happen if the Trust is liquidated is written in the prospectus.
I have not done any research on similar ETFs which have gone bankrupt though I do heard of a few ETFs which are listed in the US that has failed thus I'm not able to comment on this. Perhaps, you might want to take a look in this area.
Hello Kay,
ReplyDeleteThanks for the comments; if the risk is largely due to price movement in the market then I can stomach. I wrote to DBS Asset Management for clarification of the matter and to my surprise received no reply. I have now therefore lost interest in their STIETF. Perhaps it's better just to buy into 10 major companies of the STI and expect the performance to match that of STIETF
Hi John,
ReplyDeleteI think you will need a substantial amount of capital to buy into the top 10 companies by market capitalization that makes up the majority weightage of the STI. Since you have lost interest in the DBS STI ETF 100, what about the StreetTracks STI ETF that is being managed by State Street Global Adviser ?
Hello Kay,
ReplyDeleteNo, will just leave STIETF alone. Re top 10 of STI, if leave out the Jardine group and 2 of the 3 banks, think quite affordable buying 1 lot each; if 10 too much, start with 5, esp most of us are already stuck with many other stocks which are painful to sell at current level? Anyway, just thinking only at the mom.
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ReplyDeleteHi John,
ReplyDeleteI think it should be quite affordable if you only start with 5 but on the other hand, is 5 a good approximation for the STI ? That is something needs to be balanced. Well, if you are holding fundamentally sound stocks, you should do fine if you can wait for the market to recover.
Hi kay,
ReplyDeleteI have been reading much about STI ETF lately. However, I'm still trying to find out more about it. How do I know that ETF is a sound investment? I have looked into the financial statements of streetracks STI ETF. It seems different from a typical financial statement. Is a financial statement analysis of STI ETF possible?
Hi KF,
ReplyDeleteIt's true that the financial statement of the STI ETF is different from those of listed companies but it's easier to read it as compared to the latter in my opinion. What I will do is I will read it from line to line to see if there are any lines that sound dubious. In this sense, a financial statement analysis is possible but not in the conventional sense.
Hi Kay
ReplyDeleteIn July, streetracks sti etf announced 0.03 (onetier dividend) and 0.01 (tax exempt dividend). I was surprised that there are still companies issuing tax exmpt dividend as i thought all companies should have exhausted their section 44 credits by 2007.
Any thoughts?
Thanks!
Hi Singlish,
ReplyDeleteI'm not that familiar on this issue. Perhaps, I will check this out over the weekend.
Kay