STI ETF: What Exactly Am I Buying?

I have been on the Philip Capital ShareBuilder program for more than 3 years and recently encouraged both my siblings and readers to start a Regular Savings Plan with our friendly banker next door. 

I don’t know if it’s too good to be true but apparently (at least in theory), if we channel $500 into this Regular Savings Plan (RSP) every month, we could enjoy ~10% returns (if history repeats) and then after 30 years, the savings would accrue to become $1,000,000! And all this from a capital/savings of less than $200,000.

The above is generally categorised as passive investing. In this country, it mainly involves buying an ETF that tracks the Straits Times Index (STI). Because the whole thing is advertised as effortless and the whole process is automatic after the initial set-up, there is a danger that participants of these ETFs don’t bother to know or do anything except monitoring the value of these investments. But is that behaviour really desirable? I seriously doubt so and therefore, I have listed some basic information about the STI which I feel every RSP participant should be aware of.

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The STI is a capitalisation-weighted stock index and tracks the performance of the top 30 companies listed on the Singapore Exchange. The last revamp happened in early 2008 when the number of constituent stocks was reduced from 50 to the present 30. (Courtesy of Wikipedia again)

Even from this simple introduction and background, there’s a few things to be learnt about the STI and the tracking ETF:

1. You are not buying the entire market

Many think that buying the STI ETF is equivalent to buying the market. But this is a fallacy and even yours truly has fallen for this many times in the past.

If the investments you make are all in the STI ETF, this also means that your entire portfolio consists of 30 companies. That’s generally considered pretty good diversification, but it’s really nowhere near “buying the entire market”. Granted, the market capitalisation of these 30 big companies do make up more than 50% of the entire Singapore stock market’s value. But then, there’s still more than hundreds of other companies out there that are not part of the STI.

2. You’re essentially stock-picking too

Many advocates of passive investing have had bad experiences buying individual companies but little do they know that even when buying an STI, they are indirectly stock-picking too. Since only 30 stocks are bought using an STI ETF, this also means that one is ignoring the shares of smaller businesses like Boustead & Vicom. These are companies with considerably more growth potential than the large caps and I have benefited from their good performance during this period when the STI has remained relatively flat. 

3. You could probably be overweight on a few industries/companies

Let’s start with the three big banks. DBS, OCBC & UOB each takes up about 10% of the STI index weight. So if you’re not that bullish on banks or financial stocks, wouldn’t it surprise you that 30% of your investments are allocated to this sector? That’s what one is doing when he/she invests in an STI ETF.

Next is Singtel, which is the largest company listed in the Singapore stock exchange. With a >10% weight in the STI, it’s good to keep in mind that >10% of your RSP savings are used to purchase a share of this company.

Are you comfortable having 40% of your investments allocated to these 4 stocks? But that’s what one is signalling with an STI ETF purchase.

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I understand that this post might come across as a tad negative. But no, I am not turning my back against STI ETFs.

It’s really more about walking in with your eyes open.  😛

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    4 thoughts on “STI ETF: What Exactly Am I Buying?

      1. My 15 HWW Post author

        Hi Chin Wai,

        Have to admit I started writing this after reading your article. =)

        Your analysis is really interesting but guess there’s no strong basis (except for the fact that it’s hard for big companies to grow by much further) that this effect will be repeated? Especially if one believes in reversion to the mean.

        1. earlyretirementsg

          Hi,

          I’ve commented on this article sometime back. It’s easy to say you can beat the market after the fact that the stocks have beaten the market. That’s not what beating the market means.
          It’s the same as a gambler winning in the casino. And telling you that who says the house always wins.
          The logic is flawed once you look back and reconstruct a portfolio based on knowledge of the past. I could say that you could buy Bershire and would beat the market. The point on “cannot beat the market” is that without knowing the future, on average, you cannot beat the market. Meaning if you combine everyone’s investment who thought he could beat the market. Some would do better most would do worse.
          That’s why you cant beat the market.
          If you look back you can just buy 1 stock and say it beats the market.

          There was a reply in response to my comment. I did not respond to it.
          If I wanted to respond to it, I would say the time frame is short and you don’t know what is in the future. If you always look back and reconstruct the portfolio, you can always build another portfolio and say that will beat the market. The “market” can never answer back/or respond.

    1. ABC

      STI ETF is picking stocks but one good thing is that if any of the stocks don’t do well, then they will get kicked out of the STI and a better stock will be brought in to replace it. Hence, over the long term, you are assured of getting only winners on the STI (i.e. it is better than you picking your own basket of stocks and having to monitor and make changes to it).
      One comment is that it would be cheaper to just open a brokerage account and buy the ETF monthly on your own rather than join any of the “savings plans”. Of course, you need to be disciplined enough to do that.