SGX-listed Stock ETFs: Which are good enough for our readers? (4Q 2020)

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Difficulty: Moderate

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1) The Global ETF market has grown 6x in the past decade

It now stands at US$6 trillion in assets and 7,000 ETFs. The overwhelming number of ETFs available has led to decision paralysis for investors.

2) Most of the SGX-listed stock ETFs are sub-optimal investment vehicles.

There are 29 stock ETFs listed on the SGX. Most failed to meet our minimum acceptable thresholds and hence we do not view them as compelling investment vehicles. This threshold is based on several factors including: the ETFs’ market cap, total expense ratio, bid/ask spread ratio, daily trading volume and Index replication method.

3) We shortlisted 3 SGX-listed ETFs we find are decent enough instruments to track their chosen indices.

The 3 ETFs that survived our screen are SPDR Straits Times Index ETF, NikkoAM-StraitsTrading Asia ex-Japan REIT ETF and Lion-Phillip S-REIT ETF. We summarize the characteristics of these ETFs.

Disclaimer: We ARE NOT saying that we find these three ETFs are good to buy right now. Rather, if you have a positive view on the Index that these ETFs track, we think these three ETFs are decent enough investment vehicles to track those indices. On the other hand, we find that the other SGX-listed ETFs (which track other Indices) are not efficient instruments for investing (due to low market cap, low liquidity, high expense ratio, etc.).

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If you find this article useful, do feel free to check out our other ETF and Mutual Fund related articles too!

1. Ultimate Stock ETF List for SG Investors
2. SGX-listed Bond ETFs: Which are good enough for our readers?
3. Best ETF to buy for China Stock Exposure
4. China Tech: The best ETFs and Stocks to invest in
5. Ultimate List of LEVERAGED Stock ETFs
6. When to use Active Mutual Funds vs Passive ETFs
7. Ultimate List of Mutual Funds for SG Investors

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(OPTIONAL) What is an ETF?

Think of ETFs as a portfolio of securities, typically stocks or bonds. According to Investopedia, an exchange-traded fund (ETF) is a type of security that involves a collection of securities—such as stocks—that often tracks an underlying index, although they can invest in any number of industry sectors or use various strategies. ETFs are in many ways similar to mutual funds. However, unlike mutual funds, ETFs are listed on exchanges and ETF shares trade throughout the day just like ordinary stock.

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1) Growth of the ETF Market has led to an overchoice problem for investors

The Global ETF market has grown 6x in the past decade to reach US$6 trillion of assets today (chart below). In the past decade, we have seen the ETF market grow from a “paltry” US$1 trillion of assets in 2009 to the US$6 trillion of assets in December 2019. As asset managers launch new ETFs to meet this growing investor demand, we have seen the number of ETFs skyrocket from 2,000 in 2009 to 7,000 today.

Too many ETFs to choose from has led to decision paralysis. Akin to a diner’s dilemma of having to choose from a menu of 100 different dishes, we hope to be the friendly waiter to help feature the signature dishes of the ETF market.

There are 29 stock ETFs listed on SGX. However, not all are optimal investment vehicles in our view, even if they do cater to your desired sector and/or regional exposure. We will elaborate later on the various reasons why this might be the case. We shortlisted three ETFs listed on SGX that we deem satisfactory based on our screening criteria.

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2) We eliminated ETFs we deemed unsuitable

There are 29 Stock ETFs listed on the SGX (see table below). We ran all of them through a set of 5 screening factors as follows:

1. Market cap of less than USD 100 million.
2. Total expense ratio of more than 0.6%
3. Daily average trading volume below USD 200k
4. Bid/ask spread of more than 0.5%
5. ETFs that are synthetic rather than physically-backed

These factors are what we deem to be NEGATIVE traits and they have been highlighted in pink within the ETF table below.

Of the 29 stock ETFs, only 4 (rows highlighted in green) do not exhibit any of these negative traits. These 4 ETFs are SPDR Straits Times Index ETF, Nikko AM Singapore STI ETF, Lion-Phillip S-REIT ETF and NikkoAM-StraitsTrading Asia ex-Japan REIT ETF.

In the next section, we will review what these ETFs are currently invested in.

(OPTIONAL) The legend to the table columns are as follows:

• Base currency: Currency in which the ETF is traded and settled in.
• AUM: Assets under management of the ETF. If the ETF is also listed in other exchanges, this will show the consolidated AUM. We associate a higher AUM with 1) lower risk of the ETF being terminated by the ETF provider and, 2) lower total expense ratios, as costs are spread across a wider base. We highlight ETFs with market cap of less than USD 100 million.
• Total Expense Ratio (TER): The annual cost associated with running the ETF, as a percentage of the ETF’s AUM. This would include ETF management fees, legal fees, audit fees, trading fees and other operational expenses. We highlight ETFs with TER over 0.6%, which is on the expensive end to us.
• Daily average traded volume: This indicates how liquid the ETF is. Less liquid ETFs tend to have higher bid/ask spreads, which is an implicit cost to the ETF owner. Investors with large positions may also find it difficult to exit the position quickly with low trading liquidity. We highlight ETFs with daily trading volume of less than USD 200k.
• Bid/ask spread ratio: The difference between the ask and bid prices, divided by the ETF’s last traded price. If the buy and sell prices of the ETF is 1% apart, this 1% will become a cost to the ETF buyer if he/she decides to sell the ETF subsequently. We highlight ETFs with more than 0.5% bid/ask spreads.
• Replication strategy: The method the ETF uses to track the benchmark Index. Using a hypothetical S&P 500 ETF as an example:
  • Full replication refers to the ETF buying all 500 companies in the Index, in their respective Index weights.
  • Optimized replication refers to buying some but not all of the 500 companies, while aiming for the portfolio to be representative of the S&P 500. Tracking error tends to be higher than full replication.
  • Synthetic/Derivative replication refers to using derivatives such as swaps to replicate the returns of the S&P 500. The swap introduces in additional counterparty risk. We highlight ETFs that use Derivative replication for their portfolio.

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3) Here are the 3 shortlisted ETFs that made it past the screen!

The 3 shortlisted SGX-listed ETFs: SPDR Straits Times Index ETF, NikkoAM-StraitsTrading Asia ex-Japan REIT ETF and Lion-Phillip S-REIT ETF.

We EXCLUDED Nikko AM Singapore STI ETF, as it provides the same exposure as SPDR Straits Times Index ETF but is less efficient (higher bid-ask spread and lower trading liquidity).

Disclaimer: We ARE NOT saying that we find these three ETFs are good to buy right now. Rather, if you have a positive view on the Index that these ETFs track, we think these three ETFs are decent enough investment vehicles to track those indices. On the other hand, we find that the other SGX-listed ETFs (which track other Indices) are not efficient instruments for investing (due to low market cap, low liquidity, high expense ratio etc).

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If you find this article useful, do feel free to check out our other ETF and Mutual Fund related articles too!

1. Ultimate Stock ETF List for SG Investors
2. SGX-listed Bond ETFs: Which are good enough for our readers?
3. Best ETF to buy for China Stock Exposure
4. China Tech: The best ETFs and Stocks to invest in
5. Ultimate List of LEVERAGED Stock ETFs
6. When to use Active Mutual Funds vs Passive ETFs
7. Ultimate List of Mutual Funds for SG Investors