Showing posts with label ETF. Show all posts
Showing posts with label ETF. Show all posts

Tuesday, November 10

Which ETFs on SGX are cash-based ?

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I have received a few queries on which ETFs on SGX are actually cash-based as compared to swap-based ETFs. As explained in a previous post here, swap-based ETFs carry an additional counterparty risk and have less transparency as compared to cash-based ETFs. As such, I have glanced through all the holdings of the ETFs that are listed on SGX. You can also find out for yourself by downloading their financial statements which are available in their annual reports or their quarterly reports or statements. Under these reports, the holdings of the ETF will usually be reflected under the portfolio statement. If the portfolio looks very different from the constituent stocks of the index that it is supposed to track, chances are that this ETF is not cash-based.

So how many ETFs listed on SGX are cash-based ? The answer is surprising low. Currently there are 42 ETFs listed on the SGX. The type of ETF for these ETFs are shown below.

Cash-based ETFs
  • ABF SG Bond ETF
  • CIMBFTASEAN40 100 US$
  • DaiwaFTShariaJ 100 US$
  • DBS STI ETF 100
  • STI ETF

Swap-based ETFs
  • All db x-trackers ETFs
  • All iShares ETFs
  • All Lyxor ETFs

I did not include GLD 10US$ as I'm not familiar with it although the prospectus seems to be suggesting that this ETF is holding physical gold indeed. The DIAMONDS 10 US$ and the SPDRS 10 US$ are inactive so I did not include these 2 ETFs too.

As you can see, only 5 ETFs listed on SGX are cash-based. The rest are mainly swap-based ETFs. This means that investors are only left with a few ETFs to choose from if they only wish to invest in cash-based ETFs.
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Wednesday, November 4

More on swap-based ETFs

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In my earlier post about swap-based ETFs, I talked about how the stocks held by these ETFs may not be the constituent stocks of the underlying index that it is supposed to track.

Below are some of the snapshots from the semi-annual report taken from db x-trackers, which is a series of ETFs by the Deutsche Bank. The semi-annual report tells us about the composition of the stocks which are held by these ETFs.



The picture above shows the composition of the stocks held by the db x-trackers MSCI Japan TRN Index ETF. This appears quite alright to me since it is supposed to track a Japanese stock market index and all these stocks are Japanese companies although it may not be part of the index. How about the next one ?



The picture above shows the composition of the stocks held by the db x-trackers FTSE/Xinhua 25 China ETF. So it's supposed to track a stock market index that consists of China companies. Now take a closer look at the composition of the stocks. Do any of these names of these companies sound like China companies to you ? I'm not sure about you but these companies seem to be Japanese companies. This is what I'm talking about. Swap-based ETFs may be holding stocks that have nothing to do with the index which it is supposed to track.



In fact, the composition of stocks in the above list of ETFs issued under db x-trackers have their composition of stocks that sounds like the previous 2 pictures that I have discussed earlier. And these ETFs are tracking the stock indices of countries such as Russia, Vietnam, US, Europe and so on.

Why am I bringing this up ? That is because these ETFs, as discussed in my earlier post, lacks transparency and carries an additional counterparty risk.
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Monday, September 21

Swap-based ETFs

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Swap-based ETFs are ETFs that aims to tracks indexes by holding a basket of stocks which may be not related to the basket of stocks that makes up these indexes and it enters into a agreement with a counterparty in which this counterparty will deliver the performance of these indexes.

To explain it simply, the objective of these swap-based ETFs, as with all other ETFs, is to track the performance of a chosen index. These swap-based ETFs will hold a basket of stocks. If these basket of stocks underperforms the chosen index, another party will have to make up the difference in this underperformance to the ETF so as to allow the ETF to fulfil its objective of tracking the index. On the other hand, if this basket of stocks outperforms the chosen index, this difference will be paid to the other party since the ETF is only required to track the index. Nothing more or less.

On the other hand, cash-based ETFs are the traditional type of ETFs. Their model is simpler as compared to swap-based ETFs. Basically, they hold a basket of stocks that replicates a chosen index as closely as possible and this basket of stocks is divided into units where it is traded on the stock exchange.

Why is there a need to understand these two types of ETFs ? This is because there is an additional risk between these two types of ETFs which investors will need to know.

For swap-based ETFs, there is an additional risk which cash-based ETFs does not face and that is counterparty risk. For example, one particular swap-based ETF is tracking an index and for this specified time period, the basket of stocks which this ETF is holding on to, underperforms the index by a significant percentage. As such, the counterparty is required to pay this difference. Now what happens if this counterparty is not able to pay up ? This is one issue which investors of swap-based ETFs may have to consider. However, this counterparty risk is limited to a certain percentage of the value of the fund under regulations so the risk is not that high though it will still be there.

Furtheremore, swap-based ETFs tend to have less transparency. Investors may not know the details behind the swaps such as the value of the swaps and the collateral that are being used for the swaps.
















(Taken from Barclays Global Investors)
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Thursday, May 7

True performance of STI ETF and Unit Trust

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I did some research on the performance of local unit trusts which are focused on Singapore recently and compare it with the Straits Times Index and the performance of the STI ETF. The results proved to be quite interesting and I would like to share it my findings in this article.

The performance of unit trusts is often compared with a benchmark index. Thus, for unit trusts which are focused on equities listed on SGX, the appropriate benchmark would be the Straits Times Index. Any unit trusts that are worth your salt must be able to beat the Straits Times Index if you compare them with an appropriate time frame that is sufficently long.

Using data from fundsupermart, I have selected local unit trusts which are focused on equities listed on SGX and compare them with their annualized returns for the past 5 years against the Straits Times Index. You can see the data of these unit trusts in the diagram below and their annualized returns for the past 5 years are highlighted with a purple box.


Data of selected unit trusts from fundsupermart

So how do the performance of these unit trusts fare against the Straits Times Index for the past 5 years ? You can see their performances in the diagram below.



Out of the 8 unit trusts that I have used as a comparison, half of them managed to beat the Straits Times Index and that is quite decent after all. So the STI ETF is not such a terrific investment after all ?

There is one slight difference which is often overlooked. That one crucial difference is that the Straits Times Index, which the unit trusts are benchmarked against, does not take in the account of the giving out of dividends but the STI ETF does give out dividends.

So how much difference do the dividends play a part in affecting the performance of the STI ETF ? This time round, I calculated the 5 years annualized returns of the STI ETF with the effect of dividends being given out using Excel and it can be seen in the diagram below. If you wish to know more about the calculations, Mike from stistocks-info blog has an excellent article which can be found here.



Do take note that the dividends are adjusted for a stock split and the reason why I did not use a longer time frame was because I only managed to find the annualized 5 years and 10 years data for the unit trusts and the STI ETF was only listed in 2002.

As you can see from the diagram above, if you take into the account the effects of dividends, the returns are very different indeed. So how does that stack up with the performance of the unit trusts once again ?



The result is rather obvious. None of the unit trusts managed to beat the STI ETF when the effects of dividends are accounted for in the 5 years time frame that I selected. Do take note that the performances of these unit trusts are calculated on a bid to bid basis, in Sing dollars, with dividends being 'reinvested' at the dividend date as taken from fundsupermart.

However, 5 years is a rather short time frame to be used to compare between different investments. Preferably, I would use a time frame of at least 10 years but due to the limited data that I had, I can only use a time frame of 5 years. Otherwise, this serves well as a preliminary gauge on the performance of the STI ETF and the unit trusts.

Personally, I'm rather surprised by the results of my findings if the data that I have used are indeed correct. So if you are planning to buy a local unit trust that have their focus on equities listed in Singapore, do make a serious consideration before making your decision.
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Thursday, April 30

Investing in the S&P 500

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Besides buying into a local ETF that tracks the Straits Times Index, one can also consider buying into major US indices such as the S&P 500. However, there are a few ways in buying into an index fund that tracks the S&P 500 so which way would be the best approach ?

The first way would be to buy the associated ETFs that tracks the S&P 500 directly such as the SPDR S&P 500 ETF or the iShares S&P 500 Index ETF directly on the American Stock Exchange or in short, AMEX. That will mean that you will have to open an account that allows you to trade stocks listed in the US with a local or foreign brokerage. There are a number of drawbacks to this approach. Firstly, if you open an account with a local brokerage, the brokerage fee is quite high at a typical commision rate of 0.4% or a minimum of around 20 USD. To add on, there is also a custodian fee which means that you will have to pay a small fee monthly to hold on to your US stocks. Secondly, there is currency risk since you are paying for the US stocks in USD. That means you will have to convert your SGD to USD and you may incur a loss when you buy and sell your US stocks depending on the prevailing exchange rate. Furthermore, you will also have to incur charges for exchanging your SGD to USD.

The second way would be to buy a unit trust that is available in Singapore that tracks the S&P 500. One such unit trust is the Infinity US 500 fund. However, there are drawbacks associated with this approach too. The main drawbacks are that the sales charge is rather high at 1% and the expense ratio is also rather hight at 1.17%. However, you will not be exposed to currency risk since this unit trust is quoted in SGD. The details of the Infinity US 500 fund can be seen below.



So which way will be the best approach to invest in the S&P 500 ? Fortunately, someone has carried out a study on this issue. Assistant Professor Roger Loh from SMU has written a paper regarding this and you can check out the paper he wrote, which can be retrieved from his webpage here. The conclusion of his paper was that it may be better to invest in the ETFs listed in the US directly rather than buying the unit trust that tracks the S&P 500 due to the high expenses associated with the latter.
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Monday, February 23

Deutsche Bank launching db x-trackers

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As you might know, Deutsche Bank AG is launching 4 new ETFs that are under its db x-trackers series. The 4 ETFs are the FTSE Xinhua China 25 ETF, MSCI Taiwan TRN Index ETF, S&P 500 Short ETF and S&P Nifty CNX ETF. The management fees are rather acceptable and the table below, which is taken from SGX, summarizes the management fees for the respective ETFs.



Personally, I am rather interested in the FTSE Xinhua China 25 ETF as I believe China will become the largest economies in the world in the future. This gives local investor a chance to tap on the growth of China in the long run by holding a stake in Chinese equities. The FTSE Xinhua China 25 Index is designed to represent the performance of the China blue chip stocks. It includes the largest 25 Chinese companies listed on the Hong Kong Stock Exchange, ranked by total market capitalisation and that are sufficiently liquid to be traded.

There are many ETFs that tracks the FTSE Xinhua China 25 Index worldwide. One of them is the iShares FTSE Xinhua China 25 Index Fund and the total operating expenses is slightly higher at 0.74% which is comparable to the db x-trackers offered by Deutsche Bank. It seems that all the 4 ETFs are already listed on SGX as you can see the snapshot of the SGX website I took below.



One thing to take note of is that the 4 ETFs under the db x-trackers are trading in US dollars and you should take note of currency risk. What I mean is that due to currency flutucation between the Singapore Dollar i.e. SGD and US Dollars i.e. USD, you may be subjected to some losses. For example, you bought one of the ETFs when the exchange rate is 1.5 SGD to 1 USD. After holding the ETF for a period of time, you may wish to sell your ETF and the exchange rate at the point of selling is 1.3 SGD to 1 USD. Thus due to the difference in exchange rate, you may make a small loss.

One of more interesting ETFs in the db x-trackers will be the S&P 500 Short ETF which is an inverse ETF. As such, if the S&P 500, which is one of the major US indices goes up, the S&P 500 Short ETF will goes down. This ETF will prove to be useful for those who are hedging their holdings or for those who wish to do some market timing. Otherwise, I don't think this ETF will be useful.

The reason why ETFs can be useful and profitable to investors is because stock indices tend to rise in the long run as seen by past instances. Since index ETFs track the stock indices, we would expect them to rise in the long run too. On the contary, since the S&P 500 is an inverse ETF, one should not buy and hold it unless they have reasons as discussed in the previous paragraph. For those who wish to do market timing, I would advise them not to as it is always difficult to time and predict when will the market turn around.  

I do hope that there will be more ETFs coming up that tracks the major US indices. It seems strange to me that they can launch an inverse ETF that tracks the S&P 500 but yet they cannot launch an ETF that tracks the S&P 500. Similarly, I have yet to see an ETF that tracks the Dow Jones Industrial Average. Hopefully, there will be such ETFs being launched in the future.
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Friday, February 6

DBS launching DBS STI ETF 100

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I would like to thank the anonymous person who pointed out to me that DBS will be issuing an ETF that will be tracking the Straits Times Index. The IPO of this ETF, which will be trading on SGX under the quote 'DBS STI ETF 100',will from the 12th of February to the noon of the 15th of February and subsequently, it will be available for trading on the SGX on the 25th of February. I took a quick glance at the brochure and the prospectus and I thought it will be useful to point out some of the differences between this ETF that DBS will be issuing and the STI ETF which is currently managed by StreetTracks.

1) DBS STI ETF 100 is different from the STI ETF. Although both are ETFs that will track the Straits Times Index, their managers and trustees are different. In short, there will be two ETFs that will track the Straits Times Index on SGX.

2) The board lot size of the DBS STI ETF 100 is 100 shares per lot and one share will be roughly 1/1000 of the level of the Straits Times Index. This means that one lot, which is the minimum purchase is only around a few hundred dollars. The latest closing level of the Straits Times Index is around 1700 so that means you only need to fork out $170 to buy one lot although brokerage charges can eat into your capital heavily. However, this will be good for those who have a limited capital and plan to do dollar cost averaging.

3) The total expense fee of the DBS STI ETF 100 is currently set at 0.28%. Of this 0.28%, 0.2% is the management fee while 0.08% is the trustee fee. In comparision, the STI ETF, which is being managed by StreetTracks has a total expense fee of 0.3%. The difference is rather small though at 0.02%.

4) For those who wish to save on the brokerage charge, you can apply for the IPO through POSB or DBS atm or through DBS Vickers and I believe you will only need to pay $2 for the application fee and that's all.

Overall, I would say that the DBS STI ETF 100 is slightly better than the STI ETF due to the small board lot size and the small difference in the expense fees. A note of caution though for those who are interested, i think it will probably be prudent to see if there is any liquidity issue with the DBS STI ETF 100 when it commences trading on SGX. Furthermore, I wonder how will the issue of the DBS STI ETF 100 affect the liquidity of the STI ETF since there are now two ETFs that will track the Straits Times Index. 

The link for the DBS STI ETF 100 website can be found here.
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