Thursday, December 11

When to buy the STI ETF

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This post is part of a series of posts that discuss about the STI ETF in detail. To access the other posts in this series, click here

When is the correct time to buy the STI ETF ? This is an important question which we must ask ourselves. To demonstrate the importance of this question, let me ask a question. If you had bought the STI ETF on November 1999 at a level where the STI is around 2200 points, how long would it take to achieve a positive return ? In the picture below I have highlighted the period for which one bought the STI ETF on November 1999 with a green circle.



The answer to the previous question is 5 years and 3 months ! I have highlighted the period which the STI approaches the level of 2200 with a red circle. If you had bought near the peak of the STI, it will take you a very long time just to achieve a positive return. Moreover, if you had held on to the STI ETF which you had bought on November 1999 up to this present moment, you will be sitting on a paper loss since the current level of STI which I highlighted it with a blue circle is around 1700 and this is lower than your entry point of around 2200. Thus it is important to decide on when to buy the STI ETF.

Logically, one should choose to buy the STI ETF when the market is at its lowest level or when the market turns bearish. In this way, the STI ETF will be able to generate a positive return when the market recovers. However, this will prove to be difficult for the majority of the investing public to do so. This is because when the market is bearish, we would be surrounded with bad news such as economies going into recession, increasing unemployment rate, job retrenchment and so on. This will often induce fear and pessimism into the investing public and thus many will be afraid of buying at this point of time. You can click here to see a picture that describes the emotions experienced by the investing public in a humorous way. If one can overcome the fear of buying when the market is at its lowest level, he or she will certainly be able to achieve a good return on their investment.

So are there any other ways of knowing when to buy into the STI ETF ? In my next post, I will discuss on how can one implement Dollar Cost Averaging or in short, DCA which is a method of buying in for the STI ETF.
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Unit Trust vs ETF

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This article is taken from sgfunds.com and is written by Wilfred Ling. It gives a very well rounded view and a thorough look at the advantages and the disadvantages of both unit trust and ETF.

Advantages and Disadvantages of Unit Trust

Low sales charge for small investment. Large sales charge for big investment
The sales charge (or sometimes known as “front end load” or “commission”) for purchasing a Unit Trust is typically expressed as a fix percentage. For example, many equity Unit Trust have a sales charge of 2.5% while bonds tend to have a lower sales charge of 1.5%. Therefore, regardless of the amount of investment, the sales charge is always the same in percentage term. Therefore this permits you to invest in very small amount without paying exorbitant sales charge. Initial investment is often $1000 and subsequent is $500 and the sales charge is $25 and $12.5 respectively for 2.5% front end load. The sales charge in absolute amount is small when the investment amount is small. However, the sales charge in absolute dollar is large when the amount of investment is large. For example, if you invest $10,000 and assuming a 2.5% sales charge, the cost to you is $250.

Availability of Automatic Regular Saving Plans
Many distributors permit you to invest in Unit Trust regularly and in both small and large amounts. Better known as Regular Saving Plans (RSPs), such regular investment permits you to take advantage of dollar cost averaging. Many unit trust allow you to invest as low as $100 on a monthly basis. This is an advantage for those who could only accumulate surplus cash incrementally in small amount. Very often, new money comes in as we work. Thus the use of a regular saving plan is a discipline way of investing this new money as soon as it is available for investment.

Exact Investment Amount
When investing in Unit Trust, you know exactly how much you’ll be paying. If you invest in $1000, your payment to the distributors or bank is $1000 net. The same goes with RSPs. If you setup a GIRO to deduct $100 from your saving account to invest in a unit trust every month, an exact $100 will be deducted every month. No more and no less.

Purchase using different source of cash
Besides cash, you can purchase selected Unit Trust using CPF Ordinary Account, Special Account and Special Retirement Scheme (SRS).

Forward Pricing
Most Unit Trust employ forward pricing. By this it means that the day’s Net Asset Value (NAV) is only known in the future. This means that the unit price is unknown to both the investors and fund managers at the time of purchase. This implies that the number of units that you will receive is also not known at the point of purchase. However, the unit price and total units purchased are known a few days after the purchase.

Currency Risk and currency exchange cost
Depending on the investment mandate of a Unit Trust, the fund may invests in shares or bonds which its currencies are not in Singapore dollars. Therefore, those who invest in such Unit Trust will be expose to foreign exchange currency fluctuations that may result in loses (or gains) for the fund.

If the fund is not denominated in Singapore dollar, then any investment using Singapore dollar requires a conversation which also incurs a cost to the investor.

The worst case currency conversion cost occurs when the investor’s home based currency, the fund’s currency denomination and the currency of its underlying shares are all different from each other. For example, the Fidelity Korea fund is denominated in USD. A Singapore resident purchasing this Unit Trust is require to convert from SGD to USD. Cash received by the fund manager is then re-converted to Korean Won in order to purchase Korean stocks.

High annual expense. Costly foreign exchange. Costly cash.
One pitfall with Unit Trust is its high annual expense. Expenses like management fee, Trustee fees, performance fee, brokerage fees, GST, soft dollar commission are expenses charged to the fund and hence paid by the investors. In addition, if the currency held in cash by the fund manager is different from that of the securities he purchase or sell, a foreign currency exchange conversion cost is involved. Therefore, fund managers’ frequent trade may result in significant forex cost. It is typical for an equity fund’s turnover to exceed 100%. This means that shares purchased by the fund manager at the beginning of the year is unlikely to be held at the end of the year because it has already been sold. Such high turnover implies greater brokerage cost and high forex cost due to frequent foreign currency conversions.

Many funds hold significant amount of cash. Often spare cash is needed to meet redemption without the need to sell the fund’s securities. Sometime cash is needed as the fund manager anticipates significant investment opportunities. Other times, cash is held simply because there is no investment opportunity. Whatever the reasons, the presence of cash in a fund could be costly to the investor. As cash does not earn any return, it means this portion of the fund is not invested and hence cannot participate in any market upswing. Besides, management fee has already been paid to the fund manager to invest and not to hold cash (we can put our spare cash in fixed deposits with no management fee)

Dependence on fund manager’s skill. Fear of resignation
The performance of a Unit Trust is highly dependent on the fund manager’ skill. Such a fund relies on the manager’s market timing skill, ability to obtain information that is not available to others so as to enter and exit a particular investment faster then all other competing fund managers. Due to the high dependency on fund manager’s skill, any resignation is of concern. It is being said that if a fund house uses a team-based approach to manage its portfolio, it does not matter if a key staff leaves. However, if most of the team members leave, there goes all synergy that the team had build up over the years. Obviously for such a case, it will take the new team a long time to build up any synergy. Moreover, there is no guarantee that the new team will be as effective as the previous. As we know, this had happened to a fund house, which lost two thirds of its fixed income team and this had caused great distress to many investors.

Tax issues
According to IRAS, with effect from 1 Jan 2004, dividends from Unit Trust are not taxable (excluding distributions out of franked dividends or derived through partnership in Singapore). This is good news. However, this does not mean Unit Trust do not pay tax at all. As most securities are invested in foreign countries, there are tax liabilities paid to foreign governments and of course these are paid by the fund itself and have already been priced into the Net Asset Value (NAV), calculated on a daily basis.

Liquidity Risk
The underlying securities of a Unit Trust are bonds, shares or both. Fund managers face the same kind of liquidity risk as an investor that invests directly with these shares. In the event which the shares stop trading for some reason or are delisted, the fund house will write off these shares as having little or no value. Thus the NAV of the unit trust will drop due to this write off.

In the event of massive redemption by unit holders, cash holdings in the fund may not be sufficient to meet these redemptions. As a result, the fund manager will sell securities to raise cash. However, not all securities can be sold immediately as it depends on market liquidity. In order manage cash flow, many funds have a provision which allow the fund manager to provide partial redemptions spread across a few trading days rather then a lump sum redemption in a single day. What this means to you as an investor is that under market shock conditions, you may not be able to get out of the market fast enough. This is in contrast to holding shares directly, which you may be able to get out of the market faster.

Inferior performance
The most serious disadvantage of an Unit Trust is its poor performance when compared with its own benchmark. In the next few articles, we shall examine the performance of common Unit Trust in greater details.


Advantages and Disadvantages of Index Funds Exchange Trade Fund (ETF)

ETF are traded on the stock exchange like shares. However, the underlying securities of the ETF are basket of shares. ETF fund managers do not trade directly with retail investors. In fact, retail investors trade with fellow investors in the stock exchanges. Should there be a price discrepancy between share price and the Net Asset Value (NAV), institution investors may trade directly with the fund manager so as to use the price differential for a profit. Institution investors trade with the fund managers by using basket of shares in exchange for ETF share. They may also use ETF shares in exchange for the basket of shares. This will deplete or increase the number of ETF shares in the market place and thus influence the demand and supply of the ETF shares thereby narrowing the discrepancy between the ETF share price and the NAV. Due to this arbitrage mechanism, the share price of an ETF is normally very close to the NAV.

For the case of an index fund ETF, the underlying basket of shares are the same as those by its benchmark. An independent company normally decides the composition of the benchmark.

Good for large trade. Not good for small trade. Do not trade frequently
As an ETF is traded like share, any purchase or sales are subjected to a broker fee. Broker fees are normally expressed as a percentage subjected to a minimum charge. For example, lets assume a broker charges US$29 or 0.35% of trading principal whichever is larger. For a small amount of investment this will incur large broker fee. For a US$500 investment, the broker fee is 29/500 = 5.8%. However, for larger amount say US$2000, the broker fee becomes (29/2000 = ) 1.45% which is cheaper then Unit Trust. Of course for even larger amount, you could go down all the way to 0.35%. The larger you invest the cheaper the broker fee. Note that broker fee applies for both buy and sell. Therefore, it is not advisable to trade frequently.

Estimating the optimal amount to trade. Suitable for “buy and hold”
To better estimate the minimum amount of ETF shares you may buy without incurring exorbitant broker fee is to compare with an alternative Unit Trust. If a Unit Trust charges 2.5%, then purchasing an ETF is worth your money when the broker fee is less then 2.5%. Using the above example, if your investment is more then (US$29/(2.5%) = ) US$1160, your broker fee is less then 2.5%. Do remember that selling will also incur a similar broker fee and therefore ETF investing is suitable for those who employ a “buy and hold” philosophy.

Lack of RSP but Internet trading saves the day
Due to the manner which broker fees are structured, dollar cost averaging using small purchases cannot be done like Unit Trust without exorbitant broker fee. Still it is possible for you to employ dollar cost averaging by cumulating your surplus cash in a money market unit trust (normally 0% sales charge) until it reaches a sufficient amount to invest without exorbitant broker fee. However, the disadvantage in this method is that money not invested may lose an opportunity to participate in market upswing and therefore could be costly.

With the exception of Philips’ Share Builders Plan that can be use to purchase STI ETF and other selected shares regularly and automatically, no broker could arrange for an automated investment on ETF on a monthly basis. With the wide spread use of Internet share trading, purchase of any shares is just a matter of clicking a few buttons on the web browser and hence the lack of automated investment facility is not a significant deterrent.

Restricted source of cash for purchasing ETF
Unlike many Unit Trust, foreign listed ETF can only be purchased with cash. The local STI ETF can be purchased using cash, SRS and CPF Ordinary account.

Forex cost due to purchase/sales decreases with less frequent trades
If the ETF is denominated in US dollars, there is a forex cost when you purchase such shares using Singapore dollar currency. Similarly any sale of the share requires a conversation from US dollar back to Singapore dollar and hence this invoke another conversation cost. The forex cost is over and above the broker fee that is already paid. (No forex cost is incured if you are paying or redeeming in US dollars.) Frequent buy/sell trades increases additional forex cost. Therefore the less you trade, the less the forex cost of conversion.

Low expense. Little forex cost incured by the fund. Low/no brokerage fee paid by fund
The main attraction of index fund ETF is its low expense. It is being said that index funds are better then active managed unit trust because of its low expense. Active unit trust has such a high expense that on a long run, the erosion of its fund caused by its expenses becomes highly significant.

Unlike Unit Trust, there is little of forex cost incur by the fund itself because institution investors trade with the fund managers NOT with currency but through an electronic exchange of basket of shares certificates. Any forex cost due to the purchase of foreign shares by the institution investors are paid by them, not by the ETF funds. Similarly there is little brokerage fee charged to the fund because the ETF fund manager does not purchase or sell shares directly with the market.

Unlike Unit Trust counterpart, retail investors trade with fellow investors is independent of the fund manager. The fund manager does not interact with retail investors. Thus the frequent trades by retail investors do not increase the fund’s expenses. In addition, forex conversion cost is not propagated into the fund. This is unlike Unit Trust which multiple conversion cost is propagated to the fund if the Unit Trust’s currency denomination and the underlying shares’ currency are not the same.

Currency Risk (not the same as currency conversion cost)
Similar to the Unit Trust counterpart, investors are exposed to currencies fluctuation risk if the ETF’s underlying shares native currencies are not the same as investor’s own home based currency. Please note that there is a different between foreign exchange conversion cost (mentioned above) and currency risk. Investors are often confused between the two. In addition, any difference in currency between the home based currency and the ETF’s denominated currency is not an additional risk. For example, if an ETF is listed in US dollars but its underlying shares are denominated in Yen, then any depreciation of the US dollar against the Yen will result in an increase in the ETF NAV which is in US dollar assuming all things stay constant. If your home based currency is in Singapore dollar, your currency risk exposure is the SGD/YEN pair and has nothing to do with the US dollar.

But there is a cost involved when converting from your home based currency to the ETF’s denominated currency and vice versa and this happens when you make a purchase or sale.

Watch out for the custodial fees
Many broker impose a custodial fee for holding your foreign shares unless you trade often. Such custodial fees are normally charge as a per counter per month basis and could significantly erode your returns. Fortunately there is still one broker left that does not charge a custodial fee. Custodial fees can be reduced if you hold as few counters as possible. It is possible to construct a globally diversified equity portfolio just with 3 different ETF counters.

Note that Unit Trust does have a “custodial fee” through its annual management fee and expensive expenses.

Low dependence on fund manager. No fear in resignation. Benchmark returns
The fund manager’s duty is to ensure that its shares are of similar composition as its benchmark. Normally the shares composition of a benchmark is determined by an independent company. Therefore the management of the fund is administrative in nature and does not require the employment of top-notch and expensive managers. Due to this reason, there is little fear of any staff resignation. As its obligation is to maintain similar composition as its benchmark, any returns of the ETF will be similar to that of its benchmark.

Tax issues
30% of dividends derived from US listed ETF are taxed by the US government. There is no capital gain tax for non-US residents.

For Singapore’s side, similar to Unit Trust, resident individuals are not required to declare any foreign sourced income, including foreign sourced dividends, received in Singapore on or after 1 Jan 2004 as they are tax exempt. The tax exemption, however does not apply to foreign sourced income received through partnerships in Singapore.

Watch out for Price/NAV deviation
It is important to ensure that the share price of an ETF does not deviate too much from its NAV. Most index fund ETF share price does not deviate too far from its NAV but there are some that is persistently trading at a premium (when share price is above NAV) or at a discount (when share price is below NAV). Investors should avoid such ETF if the share price is persistently far from the NAV. Such a fund could indicate arbitrageurs’ difficulties in taking advantage of the price differential. These difficulties could be due to underlying shares’ liquidity problems.

Liquidity Risk and market shock
As ETF are traded like shares, it faces similar liquidity risk. An ETF that has low trading volume should be avoided since you will have to buy at a higher price or sell at a lower price in such a situation.

During market shock situation, it is possible for the share price of the ETF to deviate away from its NAV because arbitrageurs may face liquidity issues with its underlying securities and hence unable to quickly take advantage of the price differential situation.

Share Price known. No need to wait a few days later. Forex rate adds to excitement
One advantage for an ETF is that its share price is known during the entire market opening hours. This is unlike Unit Trust which its price is only calculated once a day and made known one or two days later (popularly known as “forward pricing”).

Like all shares, you can specify a maximum price which you are willing to buy when making your buy order for an ETF. Similarly you can specify the minimum price which you are willing to sell when making your sell order. However, as most ETF are denominated in US dollars and if you are paying in Singapore dollar, then the actual amount which you will be paying is also dependent on the foreign exchange rate at the time of transaction (which could occur hours or days after your order). This problem does not exist if the settlement currency is the same as that of the share or if your broker is able to freeze the exchange rate at the time of order.

Superior Performance
The most significant advantage of an index fund is its superior performance. Index Funds have superior performance primarily due to its low cost and secondly due to Unit Trusts' own poor performance. In the next few articles, we shall examine the returns of index funds more closely.

Conclusions
There are many advantages and disadvantages in investing in Unit Trust and Exchange Traded Funds. Depending on needs and constraints, Unit Trust may be more suitable for some and ETF may be more suitable for others.


Wilfred Ling is a freelance writer and is an active participant at http://www.sgfunds.com. He can be contacted at wilf_ling@yahoo.com. He is also an independent financial adviser and his website is http://www.wilfredling.com/
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Wednesday, December 10

Economists cut 2008 forecast to just 2.2%

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Private sector economists drastically cut 2008's growth forecast
By Rachel Kelly, Channel NewsAsia

SINGAPORE: The Singapore economy is expected to grow just 2.2 per cent this year, according to a central bank survey of private sector economists. This is nearly half the 4.2 per cent clip they predicted just three months ago.

The economists are also predicting a 1 per cent contraction for the economy – the first in eight years.

The turmoil in financial markets in October and November this year has triggered spillover effects on the global economy.

In the last survey in September by the Monetary Authority of Singapore (MAS), economists had thought the economy would grow around 4.2 per cent.

But with the collapse of US investment bank Lehman Brothers and financial problems at major Wall Street names, the outlook has become gloomier.

Market-watchers now expect the Singapore government to step in to buffer the slowdown.

Vishnu Varathan, regional economist, Forecast, said: "A very close watch factor would be how much of fiscal stimulus the government is aiming for the Singapore economy, and what form it will come in ... and what way it will be done."

Just a month ago, the government reduced its growth forecast for the economy to 2.5 per cent this year, down from an earlier estimate of 3 per cent. For next year, the survey showed that non-oil domestic exports will shrink 9 per cent.

Although economists said the construction sector is one sector due to see growth next year, they noted that this would not be enough to offset heavy falls in sectors such as manufacturing.

The key manufacturing sector is expected to contract 4.5 per cent. But the good news is that inflation will ease to around 1.7 per cent in 2009, compared with the expected 6.5 per cent this year.

Irvin Seah, economist, DBS Bank, said: "I think the fact that inflation is showing signs of easing is a very good for consumers, especially for the lower income group. High food prices would have squeezed their pockets."

On the labour front, the unemployment rate is expected to climb to 3.4 per cent next year.
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Tuesday, December 9

Safe investments preferred

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SINGAPOREANS are the second-most risk averse investors among 25 countries and territories covered by a new survey - preferring products yielding a safe or guaranteed return.

The annual Consumer Attitudes to Saving survey conducted by British insurer Aviva, which polled more than 28,500 investors worldwide, found Hong Kongers were the only investors more risk averse than Singaporeans.

Investors here and in Hong Kong also have short investment horizons, which could explain why structured products - with fixed returns over three to five years - had been so popular.

Yesterday, Mr Shaun Meadows, chief executive of Aviva in Singapore, Hong Kong and the Middle East, attributed the low-risk approach of investors here to their lack of financial confidence.

The survey found that more than half of the 1,000 Singaporeans polled, or 51 per cent, felt they do not have the information needed to make well-informed decisions on their personal finance.

And most typically turn to their family and friends for financial advice.

'Singaporeans feel poorly informed to make sound financial decisions, which might have led to a prevalent risk averse mindset,' said Mr Meadows.

Word-of-mouth is an important factor in helping guide decisions, with close to half of the respondents saying that recommendations by friends, family and colleagues who save or invest with the firm is most important when choosing a financial services provider.

Nearly seven out of 10 respondents here would recommend a financial services firm or product they like.

The survey was conducted early this year, before the outcry over failed investment products linked to collapsed US investment bank Lehman Brothers.

Mr Meadows said the controversy would likely reinforce investors' distrust of financial institutions.

He added that the current difficulties in the financial markets have not helped to build consumer confidence over where they can get reliable information.

The survey also found that Singaporeans have among the shortest time horizons for investments, behind Hong Kong and mainland China, with 66 per cent of respondents saying their preferred financial time scale was within the next five years.

The lack of affordability was cited by respondents as the biggest barrier to saving and investing more money. This is followed by the risk of losing savings or investments, low interest rates or potential growth and lack of good advice.

Now in its fifth year, the report also identified gaps in Singaporeans' retirement planning, reinforcing the need to better inform and help people save and invest for their retirement.

On a positive note, more than two-thirds of respondents here, or 68 per cent, are taking steps now to ensure that they have an adequate level of income for retirement. Still, 61 per cent are worried that they will not have enough money set aside for their golden years.

Generally, Singaporeans are open to working past the age of 62.

Investors here are second to Hong Kongers in wanting to work after retirement age. More than six out of 10 Singapore respondents, or 62 per cent, would like to work, either full time or part time, after the usual retirement age.

'All these clearly highlight the need for financial services firms to inform Singaporeans to raise levels of retirement planning to reduce anxiety about the lack of financial knowledge and insufficient levels of saving,' Mr Meadows pointed out.

This article was first published in The Straits Times on December 4, 2008.


The results from the survey are interesting indeed. The main findings are that Singaporeans have a short investment horizon of around 3 to 5 years, close to half of them felt they do not have the information needed to make well-informed decisions on their personal finance and depend on word-of-mouth as a guide for making decisions regarding personal finance.

3 to 5 years is not a short investment horizon in my opinion, at least not in the conventional sense. Usually, an investment horizon which is long is around one to two decades. A investment horizon of 3 to 5 years is sufficient enough for anyone to achieve a good return on his capital by investing in a bear market and exiting when the market recovers or is near a peak.

One should find an independent financial adviser for guidance in making financial and investment decisions if he or she do not wish to spend time in reading and picking up relevant financial analysis skills instead of relying on word-of-mouth from people they know. It is the equivalent of asking your friend to construct a building when he or she is not trained in civil engineering. Perhaps, this can also explain on why are there so many people who choose to invest in structured products when the yield for such products are rather poor. The authorities should make an effort to protect the public from poor investment products when close to half of them do not possess enough knowledge to make sound financial decisions.

Monday, December 8

STI ETF vs Unit Trust

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This post is part of a series of posts that discuss about the STI ETF in detail. To access the other posts in this series, click here

So what are the differences between the STI ETF and unit trust ? What are the advantages and disadvantages of investing in STI ETF over unit trust ? Both have their advantages and disadvantages but there is one crucial area which makes the STI ETF a more attractive form of investment as compared to unit trust.

1.Sales charge
Sales charge or sales load is the amount of fees that you have to pay for the purchase of the investment. In general, the sales charge for unit trusts that deal in equities is around 2.5%. The equivalent of sales charge for the STI ETF is the brokerage fees. This is because the STI ETF is traded over the stock exchange, thus we will have to pay the brokerage firm to help us purchase the STI ETF over the stock exchange in order to purchase the STI ETF. In addition to the brokerage fees, there are also other fees associated with the brokerage fees and they are listed below.

Brokerage fee: Around 0.25% to 0.275% or a minimum of around $25 depending on which brokerage firm and the value of the contract
Clearing fee: 0.04% on contract value
SGX Trading fee: 0.0075% on contract value
GST: 7.0% on each above item

Contract value refers to the amount of stocks that you have bought. For example, if you bought 5 lots of STI ETF at $2.00, the contract value will be 5 lots * 1000 * $2.00 = $10,000. Do take note that 1 lot is the equivalent of 1000 shares thus we will need to multiply the 5 lots by 1000 in order to get the total number of shares

The total fees for purchasing the STI ETF will be around 0.3%. Do take note that if you wish to sell the STI ETF, you will need to pay the brokerage fees again.

Regardless of any investment amounts, the sales charge for purchasing the unit trust is always fixed at around 2.5% depending on which unit trust while the brokerage fees for purchasing the STI ETF is around 0.25% to 0.275% or a minimum of around $25 depending on the brokerage and the contract value. Thus if the contract value is too small, it may be more expensive to purchase the STI ETF due to the minimum brokerage fee of around $25. Otherwise, the fees required to purchase the STI ETF is lower than than of unit trusts.


2.Annual Expense
In general, unit trusts have an annual expense ranging from 1% to 1.5% while the STI ETF have an annual expense of 0.3% currently thus the annual expense of the STI ETF is much lower than that of unit trusts. This is because the fund manager of unit trusts have to play an active role in managing the unit trust such as the purchase and sale of stocks in the portfolio. Other expenses include the fees being paid to the management and the trustee. In contrast, the fund manager of the STI ETF only needs to play a passive role in managing the STI ETF by maintaining the stocks that constitute the index and making sure that the STI ETF tracks the index.

3.Returns in the long run
The crucial difference between the STI ETF and unit trusts lies here. STI ETF has a higher probability of generating better returns as compared to other forms of investment in the long run. We can take a look at a study that compares the returns offered by ETFs and unit trusts in general.

Vanguard 500 Index Fund is a fund which tracks the S&P 500 index for the US market. Index funds are basically the same as ETF as both tracks the index except that it is not traded on the stock exchange. A study was done to show the returns of the Vanguard 500 Index Fund as compared to unit trust or mutual funds.


Looking back from Dec 31, 2002, how many US stocks funds outperformed Vanguard 500 Index Fund?

One year:
1186 of 2423 funds (or 48.9%)

Three years:
1157 of 1944 funds (or 59.5%)

Five years:
768 of 1494 funds (or 51.4%)

Ten years:
227 of 728 funds (or 31.2%)

Fifteen years:
125 of 445 funds(or 28.1%)

Twenty years:
37 of 248 funds(or 14.9%)

Taken from Lipper Inc.


As you can see from the results, the longer the time frame used to compare the returns between ETF and unit trust, the lesser the probability of a unit trust beating a ETF. In short, it is highly probable that the STI ETF is able to outperform unit trusts in the long run.

In conclusion, STI ETF will be a better form of investment over unit trusts in the long run simply due to the higher chances of achieving a better return. I will be touching on how should one go about buying the STI ETF in my subsequent posts.
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