Tuesday, April 29, 2008

Zero Certs

Dear Mr. Tan,
What is your opinion about Zero Certs? The advertisement claimed that it is like an indexed fund and is transparent. The investor can also select the Singapore stockmarket, like the ETF. Is it a good investment?

REPLY
The price of the Zero Cert is based on the index. However, all the dividends paid on the underlying stocks of the index are kept by the fund manager, as their expense charge.

The average dividend yield of the component stocks of the ST index is about 2.5%. As the Zero Cert take away the dividend entirely, the expense charge of the Zero Cert is about 2.5% per year. This is a high charge for an indexed fund.

It is better to invest in the StateStreet STI Trakker Fund (i.e. the STI ETF). The expense ratio is only 0.3%. If you earn an average dividend yield of 2.5%, you will get a net yield of 2.2% plus the gain in the price of the index.

Lesson: avoid complicated products. Invest in simple, transparent products.
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1 comment:

Anonymous said...

Dear Mr Tan,

I have recently gotten to know about Zero Certs and due to a lack of information available, I am unable to really get a clear picture of the mechanism for the working of Zero certs. Beside the high expense charges that you mentioned above. What are the other downside attached for this type of financial instruments? What about certs that track commodity index (i.e Roger Commodity enhanced index)? Is the calculation methodolgy the same? Your advise is greatly appreciated.

Thanks
Way Chieh

August 07, 2009 11:05 AM

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