Oftentimes, beginners should start with passive index investing. I strongly agree with that. One of the most popular methods would be the Bogleheads’ three-fund portfolio. It indicates that an investor should purchase one bond fund, one international equity fund and one local equity fund. In the Singapore context, some use our CPF as our “bond fund” and the S&P 500 Index as the international fund. Logically, the local equity fund would be the Straits Times Index (STI). It has ticker symbols ES3 or G3B.
Although there are merits to the Straits Times Index, I personally feel that it is not the best index a Singaporean investor can dip his money in. After all, it is your hard-earned money, we should be very picky about what we invest in. This is to ensure maximum returns. Instead of this index, I will provide an alternative at the end for Singaporean index investors looking to replicate the Bogleheads’ three-fund portfolio.
Pros of the Straits Times Index
Firstly, let me put a disclaimer that I am not discrediting the Straits Times Index. It is a country-specific index (Singapore) and there is nothing wrong in wanting to increase local exposure in your portfolio. This is why I will explain the merits of the index first so that holders of the Straits Times Index will not feel so bad and immediately sell based on their emotions (Don’t invest in the stock market with emotions!)
Easy way to dip your toes into the Singapore stock market
Oftentimes, we should invest in a diversified ETF. By logic, the Straits Times Index is the best way to invest in the Singaporean market. The 30 firms listed on the Straits Times Index accounts for close to 80% of the value of the firms listed in the Singapore Stock Exchange (SGX).
*From sginvestors.io (As at 2020-07-03 15:29)
Quick and easy diversification for Singaporean companies
As seen from the image above, buying one single ETF can result in an easy diversification of our money among large Singaporean companies that we all grew up knowing. DBS, OCBC and UOB being our major banks driving our financial sector. Singtel being our major telecommunications firm. Capitaland sponsors the largest retail mall chain in our nation.
Easy to relate to the local companies because you see them daily
With this familiarity, you will tend to develop a domestic bias. This is very common as you would feel “safer” when your money are in firms that you can see on a daily basis.
The major stocks in the Straits Times Index have also diversified their businesses to various countries in our region. This will also provide some regional exposure. This includes UOB’s large regional presence, Singtel’s ownership of Optus and Bharti Airtel, as well as Capitaland being a sponsor of many REITS including Ascendas India Trust, a REIT that gives you exposure to logistics and IT parks in India, a fast-growing market.
No forex risk
In Singapore, we use SGD. Although not all companies on the SGX are traded using SGD, the STI ETF (ES3/G3B) is traded using SGD. This eliminates forex risks because there is no need to fear that the currency of other countries will depreciate against the SGD or SGD will appreciate against other currencies.
This is because if you buy stocks in other currencies, and one the above scenarios occurs, it will result in a dampening effect or even a depreciation in value of your portfolio.
Cons of the Straits Times Index
Heavily weighted in the financial sector
If you look at the above image of the STI ETF, it is not difficult to see that the 3 banks (DBS, OCBC, UOB) dominate the index, with a weightage of 36.7%. This might lead to an over-weightage in the sector’s risks. Given the current low interest rate environment (until 2022), these lenders will be experiencing a drop or at least a lacklustre increase in profits for the next few years. They will be unable to “carry” the index any longer.
If your purpose to buy an ETF is to diversify, and the index does not do that job very well, what is the point then?
Lacklustre growth over the years compared to the S&P 500
Just looking at the graph above, we can easily see that the STI ETF has experienced very lacklustre performance in the past decade. Although many investors cite 2000-2010 to be the “lost decade” for the S&P 500, where the S&P 500 returned negative for the decade and many emerging markets saw growth, I still believe that the potential of the S&P 500 is higher than the STI ETF. This is based on the fact that the S&P 500 is a larger and more diversified index which includes high-growth firms whereas most firms in the STI ETF remain in the traditional sectors.
Even for the COVID-19 pandemic, the S&P 500 has recovered significantly, forming a “V”-shape recovery as compared to the STI ETF, where recovery still remains uncertain.
Due to the high fees of listing on SGX, it has attracted many poor companies, leading to many penny stocks being in the exchange. This has resulted in a loss in investor confidence because the firms have poor business models that are just unsustainable. This has led to poor valuations among the smaller firms in the exchange. Although not a direct impact to the index because they hold the top 30 firms, it may become more apparent and obvious in the long term.
If you are buying this index for the long term, and you don’t see it performing as well in the long term, doesn’t it make sense not to invest in it?
Inability to attract strong companies to list on SGX
Along with its poor valuations, the SGX has been unable to attract strong growth companies to list on SGX. This is a result of high fees to list them and an overly rigid and traditional way to assess firms.
This is seen by top Singaporean firms such as Razer choosing the Hong Kong stock exchange. Also, Sea Limited (Owner of Shopee and Garena) to list on the New York stock exchange. Recently, due to a huge rise in valuations and partly because of the pandemic, Sea Limited has taken over DBS to become the largest Singaporean firm by market capitalisation. Yet they are not listed on the SGX. This means future firms may follow their footsteps and set list outside of SGX.
Traditional firms which lack disruptiveness
If you have read my Tesla stock article, you would know that I favour the idea of disruption. I believe that it will bring about huge growth to a company if that occurs. The issue is that the traditional firms that form the STI ETF lack that disruptiveness and innovation. Although there have been innovation efforts, such as DBS becoming more and more innovative, it can be said that it was driven by the government. MAS issued digital bank licenses. One of its purposes was to drive and increase competition in our financial sector which can lead to a boost in our economy.
Why I sold it
The latter part of the article seem to bash on the index a lot. In fact, I still think that the index has its own merits. However, there is one main reason why I sold it. And that is because Singapore is no longer an “emerging market”. It is part of the developed world, outside of US. In the long term, I am already practising the strategy of “Buy-and-hold” of VT. VT is an ETF by Vanguard which seeks to track the performance of the FTSE Global All Cap Index. VT has a composition of 60.1% in North America and the rest in other markets. It is basically your all in one diversified package. I foresee the performance of this ETF to be consistent for decades to come.
I personally believe that having a stake in the STI ETF will not help in my returns or my goal of diversification. In any case, it may be better (at least for the recent decade) to invest in QQQ. QQQ is an index which tracks the top 100 firms in the NASDAQ. Therefore, holding QQ will increase your exposure to US markets.
Alternative to the Straits Times Index
As mentioned earlier, this is an alternative I propose as a “Singaporean” version of a Bogleheads Three Fund Portfolio.
It consists of
- The Local Stock Market Index Fund
- The International Stock Market Index Fund
- The Bond Fund
Local Stock Market → Individual REITs.
As risky as it sounds, individual REITs seem like the only consistent dividend play that most investors can benefit from the SGX. The REITs ETF is rather lacklustre and so is the STI ETF. If you want a fuss-free option, consider the Syfe REIT+ Portfolio.
International Stock Market Index Fund → VWRA.
It is listed in the LSE, thus you can enjoy a 15% withholding tax rate, instead of the NYSE counterpart which is 30%. Moreover, it is an accumulating fund. Thus, dividends are automatically reinvested. It will be beneficial for young investors looking to grow their investments instead of living off their retirement. I will not go into too much detail in this article.
Bond Fund → CPF
Every Singaporean is mandated by law to have a CPF account. Our CPF investments are very safe. They are handled by our government and gives us a solid return of 4%. Although it is very illiquid (you can only withdraw it after the age of 55), it is still part of your wealth. And the plan of this 3 fund portfolio is to become rich after retirement.
If you really want a more liquid alternative, consider our local bond funds such as MBH and A35. Internationally, BNDX may be a good consideration as well.
Disclaimer: Do your Own Research
My content is intended to be used and must be used for informational purposes only. It is very important to do your own analysis before making any investment based on your own personal circumstances. You should take independent financial advice from a professional in connection with, or independently research and verify, any information that you find on our Website and wish to rely upon, whether for the purpose of making an investment decision or otherwise.