Exchange Traded Fund or ETF investing in Singapore is a great way to diversify your portfolio. It involves a list of funds that are traded on the local stock exchange.
Unlike other strategies, your ETF investment will not involve putting your money in one company. You will pool your money with other investors. All your money will be invested based on the specific goals of the ETF.
For instance, an ETF can track a specific index like the Straits Times Index (STI). The STI is composed of 30 of the best companies in Singapore. When you invest in the STI ETF, that means you are investing your money in all of these companies. The amount that will be invested per company will depend on the weight of each stock. For instance, if SingTel has 10% of the STI, 10% of the ETF will be invested in that company. If Jardine holds 12%, the same percentage of the ETF will be invested in it.
If all of these seem complicated and tedious, do not worry. The ETF manager will take care of the investment details for you and the rest of the investors who placed their money in the same fund. This service means ETF investing in Singapore will entail fees and charges – but it is usually lower compared to investment funds that are actively managed.
What is involved in ETF investing in Singapore?
There are a couple of facts that you need to know about investing in Singapore ETFs.
You have to understand that ETFs in Singapore come in somewhat, complex structures. For instance, a cash-based ETF invests the funds directly to the assets of those included in the index. Synthetic ETFs, on the other hand, base the returns from derivative products.
There are also ETF investment products included in the SIP or Specified Investment Products. These are mostly derivatives or a product that contains derivatives like futures, certificates, or structured warrants. This makes it a bit more complex – but it is worth the inquiry if you wish to invest in ETFs. Truth be told, it is difficult to anticipate how the derivatives of an SIP can affect the performance of your investment. One failure may or may not have a significant effect on the investment. You need to specifically ask the fund manager if the ETF investing in Singapore involves SIPs.
To be clear, an ETF investment usually tracks the performance of an index. That being said, there are several indices in the Singapore market. You have bond indices and commodity indices. The most common index that is invested in are equities and stock indices. The STI is the most common index for this type. In case the stock index rises by 2%, the ETF will also experience the same return. Based on the local market trends, investing in this type of ETF is a good idea at the moment. There are so many indicators that the local stock market is “becoming increasingly bullish” with the most gains coming from the industrials and telecoms section.
Any investment in an ETF involved buying units of that fund. When the index rises, the unit price increases as well. That is where the ETF base the investment returns. There are also ETFs that pay dividends – so make sure you understand the specific payouts of your chosen investment strategy.
You should also understand that any investment return that you will get from an ETF will be subjected to fees and charges. Although it is lower than other investment types, it will still affect the overall payout that you will get. Not only will there be commissions, you should also be prepared to pay transfer taxes – something that is common in ETF transactions on the SGX.
You need to have the right mindset when you want to pursue ETF investing in Singapore. Some people choose this type of investment because buying a unit in the ETF exposes you to the performance of the whole index that it is tracking. For instance, if you invest in an STI ETF, you get to benefit from the performance of the 30 of the biggest companies in Singapore – all of which are a part of the STI.
Signs that ETF investing in Singapore is for you
Here are the signs that will prove that investing in ETFs is the right investment strategy for you.
- If you want to get a high return and you are prepared to risk your investment – at least a significant part of it. Sometimes, if one or a few companies in the index performs badly, that can affect the overall investment.
- If you understand how ETF returns are calculated. As mentioned, ETFs can be confusing because of its complex structures. There are scenarios that you may not expect or anticipate because the factors affecting the returns can be very significant. If there is something that you do not understand, ask the fund manager.
- If you know the risks involved in ETF investing in Singapore and you think you can tolerate it, then go ahead with the investment. ETFs that involve derivatives are more complex and unpredictable so do your research and invest cautiously.
- If you can leave your investment untouched for a long time. The only way to avoid the negative effects of the short-term price fluctuations in the local market is to leave your investment untouched for quite some time. While there are ETFs that can be used for short-term investment goals, it is not always advisable for all.
Before you pursue ETF investing in Singapore…
It is important to get to know the fund manager of the account. Not only that, you have to research the track record of the index that the ETF will be invested in. You want to make sure that it is going strong and will help you get high returns. For instance, Singapore REIT ETFs are expected to offer high yields. The Monetary Authority of Singapore mentioned that this is one of the “safe havens for debt-wary investors.” There is currently a high demand for real estate property in Singapore and with supply lower than the demand, prices are expected to go up. This is the type of data that you need to look into. Do not just consider the current high yields. Make sure the yields will increase in the next few years so you can minimise the risk of your ETF investment.