Index funds are the most popular type of investment that has lasted for a long time. Most investors, including Warren Buffets, are well-regarded forms of investment. These are a low cost when compared with other forms of investments. They are also low-risk stocks and other assets that track a specific market index.
Also, Index funds are ideal for tactical investors who want to make tactical bets on macro trends and efficiently move their money in and out of macro trade.
In this guide, you’ll have all the information you need to know about Index funds in Singapore and why there is a lot of buzz around them. Also, you’ll learn how to start investing in index funds immediately.
What Is an Index Fund?
An Index fund is an example of a mutual fund or an Exchange Traded Fund (ETF) with a portfolio made to track or match the components of a financial market index such as the STI index in Singapore.
It gives investors broader market exposure, low portfolio turnover, and operating expenses. Index funds follow their benchmark index regardless of the state of the markets.
You can start investing in index funds through a fund manager, an online stock broker platform, or a full-service broker in Singapore.
One of the cheapest and easiest ways to access index funds is through Exchange Traded Funds (ETFs) traded on the Singapore Stock Exchange (SGX).
Before you start investing, you should keep in mind that not all ETFs are index funds and some funds are riskier to invest in than others. We will explain further below.
How Do Index Funds work?
Index funds hold a collection of stocks that make up a specific index. If a particular company leaves an index, the fund manager will sell the stocks and replace the stocks with new stocks. This is part of why index funds are considered safer than buying stocks directly from a company.
It require less management than other types of stocks. Remember that index funds are sometimes referred to as mutual funds in global markets, but within Singapore, index funds refer to ETFs.
Exchange-Traded Funds or ETFs are a collection of securities listed on a particular stock market, such as the SGX. They are typically passive investments that track an index or an asset, but it’s not always the case.
These terminologies are pretty confusing and keep changing across different borders. Traditionally managed funds or mutual funds in the U.S. and other countries are few in Singapore. Instead, Singaporean investors put their money on ETFs to track stock market indices since they work the same way.
However, ETFs are easier to access and have a lower minimum cost requirement.
What Are the Differences Between ETFs And Traditional Index Funds?
Traditional funds are similar to most ETFs in that they are pretty low-cost and track a significant underlying index. They, however, have differences. Here are some of them:
- They have different prices. The price of an ETF is its market value based on its stock market performance. However, the price that you might buy or sell an index fund is the net asset value of the underlying securities.
- ETFs are listed on the stock market, while index funds are unlisted managed funds.
- ETFs have a lower initial investment, while index funds typically require a higher minimum investment, in most cases more than $5,000. You can buy most ETFs for less than $100.
- ETFs can be bought or sold at any time on a trading day, while index funds can only be priced at the end of the day.
- Index funds do not have a transaction fee, while there is always a brokerage fee involved in buying and selling an ETF. This means managed funds are an excellent option for investors looking to add small amounts to their funds’ overtime frequently.
- ETFs have lower fees when compared to traditional funds. When you consider taxation and management fees, traditional index funds could be the ideal funds for you.
Where Should You Start?
In Singapore, Index funds are the same as ETFs. There are three common ways to invest in EFTs. They are:
1. Brokerage Account
This is similar to how you buy and sell stocks in Singapore. There are about 45 ETFs, according to the Singapore Exchange (SGX). The number might be lower since some ETFs are listed in dual currencies.
Most brokerage accounts have access to significant stock in other countries. You can also invest in ETFs from global markets exchanges.
2. Regular Shares Savings (RSS)
You can invest in ETFs in Singapore through 4 RSS providers. Some of the RSS providers in Singapore allow you to invest in individual stocks or other ETFs listed on global markets.
3. Through Robo-Advisory Trading Platforms
There are about 11 Robo-advisory trading platforms in Singapore, and only 9 of them offer ETFs as a form of investment. However, Robo-advisors are exposed to broad indexes listed in the U.S market. The best part is some have financial advisors who give investment advice on the best ETFs to invest in
Steps in Investing in An Index Fund
Prominent fund managers in Singapore offer a limited amount of index funds. However, ETFs are more available in Singapore.
Traditional Index funds can also be purchased directly through associated funds providers such as BlackRock and Vanguard Investments. ETFs can also be purchased through any regular stockbroking account.
Whether you want to invest in an unlisted index fund or an ETF. Here are the steps you need to follow:
1. Consider Your Strategy
Before starting your journey, you must establish the goal you want to achieve through your investment. You must consider your time frame and the amount of risk you are willing to take.
You must also consider when to withdraw the funds, either in years or after ten years.
2. Assess Your Options
Before choosing your index fund, you must first compare different funds online and match your goals. Ensure that you consider all the risks, the past performance of funds, brokerage fees, and other transaction costs.
Here are things to take into account before you decide on an index:
- Transaction fees
- Management fee
- Brokerage fees
- The fund’s performance in the last 3,5 and 10 years
- Whether the funds are safe or do contain some volatility
- The minimum initial investment amount and how often you need to transact from the fund
3. Sign Up Through an Online Broker or A Fund Manager
When you find the right index fund, you must know the best way to access it. You can access many index funds through fund providers Vanguard and BlackRock Investments.
When you apply directly to a fund manager, you will have to fill out an application form to provide proof of address, tax file number, and I.D. You will need to post the form, and it will have emailed back with a cheque or any other proof of transaction.
Another option is where a financial planner can apply for an index fund on your behalf.
The ETFs are more accessible on an online trading platform and can be purchased just like any other stock in the market. You must sign up for an online stock brokerage platform with this process.
Here are some of the things that you will need:
- Provide personal details and proof of I.D.
- Transfer the money into a trading account
- Log in to your account
- Lookup for the ETF you would like to place your order and buy.
What Are the Risks of Investing in An Index Fund?
Here are some of the risks you expose yourself to when deciding to invest in Index funds.
No Control Over Your Holdings
Index funds are set portfolios. When an investor buys an individual index fund, they have no control over the specific holdings in the portfolios.
You may love companies on the portfolio and others not as much. So you may want to invest in one more than that other. However, you have to invest in them since they are part of the same index fund.
Lacks Reactive Ability
It does not allow for reactive behavior when you invest in index funds. For example, if a stock is overvalued, it carries more weight in the Index.
Other times stocks may be undervalued. Even when stocks are overvalued or undervalued, you cannot do anything about it since you invested through the index fund.
Lacks Downside Protection
Over time the stock market has proven to be an excellent investment. However, it has had its fair share of bruises and bumps over the years.
Investing in an index fund will give you an upside when the stock market is doing well, but it will also leave you completely vulnerable when it’s the opposite.
Some investors who have heavy exposure to stock index funds can hedge their exposure to the Index by shorting futures contracts from the Index or buying a put option against the Index. However, these two methods move in the opposite direction; hence using them together might defeat the purpose.
However, it is essential to note that hedging is a temporary solution in most cases.
Limited Exposure to Different Strategies
There are numerous strategies an investor can use for success. However, when you buy an index in the market, it may not give you access to many investment strategies and ideas.
Sometimes investment strategies are combined to provide investors with better risk-adjusted returns. Index investing offers you diversification, which can also be achieved by having about 30 stocks instead of 500 stocks, as with some indexes such as the S&P 500.
When you conduct research, you may find the best value stocks, growth stocks, and other types of stocks through different strategies. Find out the best stock to invest in Singapore.
After you are done with your research, you can combine the stock into a smaller, more targeted portfolio. This way, you will provide yourself with the best-positioned portfolio that the overall market. You create a portfolio that’s better suited for your risk tolerance and goals.
Dampened Personal Satisfaction
Investing can sometimes be worrying, especially when the market is in turmoil. When you select certain stocks, you might keep checking the quote, which can also keep you awake at night. These situations can only be averted when you invest in an index.
You can still find yourself keeping checking how the market is performing even when you have invested in an index. This can lead you to lose your excitement and satisfaction in making a good investment and enjoying your money.
Popular Index Funds in Singapore
Here is a list of popular index funds in Singapore:
|ETF in Singapore||What it tracks||Expense ratio|
|SPDR STI ETF||Top 30 companies on SGX||0.30%|
|Lion-OCBC Securities Hang Seng Tech US$||Top 30 tech companies on HKEX||0.45%|
|SPDR Gold Shares ETF GLD US$||Price of gold bullion||0.40%|
|iShares USD Asia High Yield Bond Index ETF||High yield bonds by Asian/ Asian-based governments & companies||0.50%|
|Nikko AM STI ETF||Top 30 companies on SGX||0.30%|
|NikkoAM-StraitsTrading Asia ex Japan REIT ETF||High growth Asian REITs (excluding Japan)||0.60%|
|Nikko AM SGD Investment Grade Corporate Bond ETF||Quasi-sovereign, Singapore, and foreign corporate bonds||0.25%|
|ICBC CSOP FTSE Chinese Government Bond Index ETF US$D||Performance of the FTSE Chinese Government Bond Index||–|
|ABF Singapore Bond Index Fund||Singapore government + quasi-govt bonds||0.25%|
|Lion Phillip S-REIT ETF||High dividend Yield Singapore REITs||≤0.54%|
If you are looking to start investing in index funds or ETFs in Singapore, the above list will give you an idea of where to start.
1. SPDR STI ETF (SGX: ES3)
SPDR STI ETF has been around since 2002, and it has the most significant fund size on the list, meaning it’s the most popular. It also tracks the STI more accurately and has an expense ratio of 0.3%.
2. Lion-OCBC Securities Hang Seng Tech US$ (SGX: HSS)
Lion-OCBC Securities Hang Seng Tech US$ is the most popular USD variant and goes by HSS. It has a trading lot size that is very accessible at ten units. It is excellent for beginners and has an expense ratio of 0.45%.
3. SPDR Gold Shares ETF (SGX: O87)
SPDR Gold Shares ETF is ideal if you are the type of retail investor who is super paranoid since you will be investing in gold. The gold ETFs fall under the SPDR Gold Shares, which tracks the prices of gold.
SPDR Gold Shares ETF has an expense ratio of 0.4%.
4. iShares USD Asia High Yield Bond Index ETF (SGX: O9P)
iShares USD Asia High Yield Bond Index ETF has a higher risk of B.B. credit rating due to the higher price volatility. This ETF also gives you higher interest rates and higher incomes as well.
iShares ETFsfirst came to the market in Dec 2011 as Bloomberg Asia USD High Yield Diversified Credit Index (USD). It is a collection of high yield Asian bonds such as the Industrial and Commercial Bank of China (ICBC), Bank of Communications (BOCOM), The Islamic Republic of Pakistan, Celestial Miles Limited, Wynn Macau casinos, and others.
It has an expense ratio of 0.5%.
5. Nikko AM STI ETF (SGX: G3B)
Nikko AM STI ETF is the other STI ETF in Singapore. It is much younger than SPDR, but it can match its price. Nikko AM and SPDR have the same expense ratio of 0.3%.
Nikko AM, however, has a more significant tracking error, which means it does not replicate the STI as accurately as SPDR does.
6. NikkoAM-StraitsTrading Asia ex Japan REIT ETF (SGX:CFA)
Nikko-StraitsTrading Asia ex Japan REIT ETF replicated the performance of the FTSE EPRA Nareit Asia ex-Japan REITs ((Real Estate Investment Trusts) 10% Capped Index, a collection of the highest performing Asia real estate investment products.
It includes Singapore REITs such as CapitaLand Mall, Ascendas REIT, Frasers, Mapletree, Suntec, Parkway Life, Keppel, etc.
NikkoAM-StraitsTrading Asia ex Japan REIT ETF has an expense ratio of 0.6%.
7. Nikko AM SGD Investment Grade Corporate Bond ETF (SGX: MBH)
Nikko AM SGD Investment Grade Corporate Bond ETF is a collection of investment-grade quasi-sovereign, Singapore, and foreign corporate bonds that tracks the performance of the iBoxx SGD NonSovereigns Large Cap Investment Grade Index.
You can expect to see UOB, DBS Group, OCBC, Temasek Financial Limited, Changi Airport Group, and Manulife Corporation on this ETF.
Nikko AM SGD Investment Grade Corporate Bond ETF has an expense ratio of 0.25%.
8. ICBC CSOP FTSE Chinese Government Bond Index ETF US$D (SGX: CYB)
ICBC CSOP FTSE Chinese Government Bond Index ETF US$D was listed on the SGX in Sep 2020. It replicates the performance of the FTSE Chinese Government Bond Index through a sampling strategy. The Index comprises the best investments, 99.4% of China bonds.
This means that ICBC CSOP FTSE is a collection of Chinese Government bids. These bonds are top-rated and have an attractive yield. This ETF does not have an expense ratio.
9. ABF Singapore Bond Index Fund (SGX: A35)
Bonds are attractive investment assets for the risk-averse and seek a safe investment in case of a stock market crash.
High-profile bonds such as the Singapore Savings Bonds, Temasek Holdings Bond, and the Temasek-linked Astrea IV and V Bonds have grown in popularity in Singapore.
ABF Singapore Bond Index Fund lets you buy these bonds. The average returns from this ETF are not extremely high, but you have a guaranteed bond coupon payout.
ABF Singapore Bond Index Fund expense ratio is 0.25%.
10. Lion Phillip S-REIT ETF (SGX: CLR)
Lion Phillip S-REIT ETF is another ETF in Singapore that affects conventional Singapore investors. This ETF focuses on real estate.
REITs are now the most popular type of investment in Singapore at the moment. When you buy a REIT, you become a part landlord and collect the rent in terms of dividends.
Lion Phillip S-REIT ETF tracks the Morningstar Singapore REIT Yield Focus Index that focuses on the performance of 25 top-performing S-REITs rather than investing in just one REIT.
Lion Phillip S-REIT ETF has an expense ratio of an average of 0.54%.
Advantages of Investing in Index Funds
The following are some advantages of investing in index funds:
1. No Bias Investing
Index funds an automated and regulation-based investment strategy. The fund manager or financial advisers are given a defined mandate of the amount invested in the index funds. This helps eliminate human bias or discrimination while making your investment decision.
2. Easier to Manage
When you invest in index funds, you do not have to worry about how the stock performs in the market. This makes index funds very easy to manage. You will only need a fund manager to rebalance the portfolio once in a while.
3. Low Fees
An index fund mimics an underlying benchmark; hence there is no need to have a research team to help the fund managers to pick the right stocks. With index funds, there is also no active trading of stocks. These factors lead to the low managing cost of an index fund.
4. Tax Benefits of Investing in Index Funds
Index funds are passively managed; hence, they enjoy a low turnover, leading to fewer trades placed by a fund manager in specific years. Fewer trades mean common capital gains distributions that are passed to the investors, hence less withholding tax.
5. Broad Market Exposure
Investing in Index funds means that your portfolio is diversified across different stocks and particular sectors. This means that an investor can gain high returns on the more significant marker segment through an individual index fund.
6.Index Funds are Safe
Most fund managers consider index funds safer than direct stock market investing because the indexes are less volatile than the individual stock.
What Is A Stock Market Index?
A market index is a collection of stocks listed on a stock exchange. The most well-known Index is Singapore ins Straits Times Index (STI). STI is a market capitalization-weighted index that tracks the performance of the top 30 companies on the Singapore Exchange (SGX).
These indexes are often cited in the media because investors use them to track the overall performance. They rise and fall based on company news and economic indicators.
Why Invest in An Index Fund?
Index funds have proven over time that they perform better than other investments. They have been approved by one of the most successful investors Warren Buffet. In 2007, she made a $1 million bet that a bundle of actively managed funds would perform worse than the S&P 500 over ten years.
Warren argued that the fund tracked a significant index, which would deliver better returns than an actively managed fund. After ten years, Warren won the best.
His point is that significant indexes fluctuate yearly and usually rise over a long period. For example, the S.T. index fell by 44.1% in 2008 during the 2008 global crisis, but you would still be in a better financial position today if you had invested before that if you did not invest.
An index fund is a managed investment fund with a portfolio of stocks and other asset classes. It offers investors a low-risk method of long-term investing. However, index funds do not provide the most flexibility with the investment strategy used.
- Index funds hold a collection of stocks that make up an index
- Index funds offer greater returns than individually managed stocks
- Singaporeans use ETFs to track indices since they work the same way as traditional index funds.
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