Tuesday, November 03, 2009

Exchange traded fund (ETF)

There are many exchange traded funds (ETF) that are being marketed in SGX. The advantages of an ETF are:

a) It is a fund comprising of many underlying shares, i.e. provide diversification
b) It is invested to mirror a market index
c) The management fees are low
d) It can be traded at any time through the exchange

A good example of a ETF is the StateStreet Tracker fund, which is listed as STI ETF. It has an annual management fee of only 0.3%.

The annual fee for ETFs ranges from 0.2% to 1% depending on the fund manager. The ETF that are invested in China or India are likely to have higher fee.

If you buy a ETF, you pay a brokerage of around 0.3% plus GST and other charges. It can amount to 0.4%.

The annual management fee of a ETF is lower than an actively managed unit trust. For the unit trust, the manager will try to outperform the market. But, according to independent studies, most active fund managers had not been able to outperform the market, in spite of their higher fees. It is better to invest in a passively managed fund that mirrors the market, i.e. an indexed fund or ETF.

Tan Kin Lian

12 comments:

Hiei said...

The ETF invest in the individual stocks that track the index? If so, does ETF gives you the dividend payout when the individual stocks declare so?

Tan Kin Lian said...

If you invest in a ETF that track the index, you should get the capital gains plus the dividend yield, plus or minus a tracking error (which should be small).

If the index gains 10% and the dividend yield is 3%, your return in ETF should be 13% less the management fee (say 0.3%)

Anonymous said...

How to invest in a ETF as a start?

Vincent Sear said...

It's the same as buying shares, e.g. SingTel, Capitaland etc. Open an online brokerage account and you can start buying and trading.

Anonymous said...

May i know how do we pay the management fee?

Thanks.

Unknown said...

I think you should also consider good active managed funds that consistently outperforms the index over a long period of time. A 3%pa outperformance compounded over 20 years can net 80% more.

The problem with investors is the chasing for new unit trust launches; ie ipo mentality. They rushed to tech funds during tech boom in 2000 and to capital protected funds when tech busted in 2001.

Another is switching of funds too frequently which is akin to timing the market. With free switching offered by distributors, I am not sure it will benefit investors over the long term.

A Tan said...

There are only three ETFs here -- the two STI ETFs and the DBS Bond ETF.

The others are in pount of fact -- Exchange Traded Notes, even though SGX calls them ETFs.

The creators of these ETNs use derivatives -- they don't buy the shares unlike the three ETFs.

As these ETNs are structured products, they are subject to the same risks in theory as things like minibonds and HN5, Pinnacle and Jubilee notes. But as they are listed, one can reasonably expect that SGX has done its due diligence on these ETNs.

Vincent Sear said...

You only pay transaction fee to your brokerage firm, i.e. the buy and sell commissions, usually 0.5% or S$25 minimum if you trade online. The fund management fee isn't charged to you directly; it's charged to the fund and dedicted from the fund NAV.

Anonymous said...

ETFs are a good starting point for new investors, but bear in mind they work in the same way as shares traded on SGX, and thus swing up and down in the prices according to market sentiment.

Vincent Sear said...

Don't dabble in stocks if you don't have S$10k lump sum to put aside for quite a while. If you buy one lot of penny stocks at say S$0.50, i.e. S$500 for 1,000, though commission rate is quoted at 0.5%, you'd still incur a minimum of about S$25. Upon selling another, S$25. That's total costs of about 10%. For only a few minutes or even seconds of order matching and trade clearing, that's proportionately even a worse deal than buying the most expensive endowment policy.

The last generation of stock traders probably started off with SIA. The generation probably started off with SingTel. I'd recommend (with disclaimer for any responsibility towards outcome of course) that newcomers start off with SingTel and StateStreet Tracker to get a feel of the market in a relatively more stable way first. Then venture to others.

Anonymous said...

is it possible to short sell an ETF

Vincent Sear said...

I think that SGX rule on naked shortselling is one day only; if not settled within the same trading day, next trading day morning forced buyback. For covered shortselling, you have to check with your stockbroker for stockborrowing. Anyway, I don't recommend shortselling ETFs. Candidate stocks for shortselling should have the characteristics of fluctuating widely and regularly.

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