Exchange Traded Funds (ETFs) on SGX

Are you the sort that likes to invest in unit trusts but wonders if there are any other alternatives without dipping your hands into individual stocks? Read on for more :)

[Photo: Markehr]

The Business Times reported on 4th Jun that Exchange Traded Funds (ETFs) hit record trading volume & value for two months in a row on the Singapore Exchange (SGX). ETFs are not new to Singapore, but they have become viable investment alternatives in their own right. If you have never invested in one or don’t know what’s the big deal about ETFs, this is a good time to find out more.

What are ETFs?

The best way to understand ETFs is to compare it to a unit trust. If you are familiar with unit trusts, you already know what an ETF is. Like unit trusts, ETFs allows us to invest in a group of stocks or other assets at one go.

For example, you may be thinking Taiwan’s growth prospects is now brighter after the proactive economic link-ups with China since the Kuomintang party return to power. You can certainly invest in the future of Taiwan by buying a unit trust focusing on Taiwan, but you can just as easily buy a Taiwan ETF instead.

ETFs compared to Unit Trusts

But, if ETFs are just like unit trusts, why even bother? Well, it’s then time to look at the differences between an ETF and a unit trust. ETFs in general have several advantages compared to unit trusts:

1. ETFs are continuously traded on SGX. When you buy or sell an ETF, you know the exact price immediately. In contrast, you must wait for at least 1 day or more to find out your transacted price for a unit trust, since the net asset value (NAV) of a unit trust is typically only calculated once a day.

2. Transaction costs of ETFs are much lower. You will usually need to pay a 1% – 2% sales charge to buy a unit trust. This can be much more depending on where you buy your unit trusts from. On the other hand, the transaction costs for an ETF can be as low as 0.28% through most stock brokers in Singapore.

3. You can “short-sell” ETFs. No unit trust in Singapore allows you to short-sell. However, the SGX now has a S&P 500 Short ETF by Deutsche Bank that inversely tracks the S&P 500 stock index in the US. Its price increases when the S&P 500 index decreases. This effectively allows you to profit when you can foresee the US stock market falling.

As with any investments, there are also things you should look out for before investing in an ETF. The key issue you need to be aware of is forex volatility for non-Singapore ETFs. These are usually traded in US dollars. If the US dollar is appreciating, you certainly benefit. But if the US dollar depreciates, your profit will be reduced by the forex loss.

Why invest in ETFs?

ETFs is a good investment for those who have the spare cash but do not wish to spend the time or effect to pick out winners one by one. Instead, you look at an entire market and invest in those that you feel will outperform. What’s more, you can hold on to ETFs for as long as you wish, just like stocks. This means that ETFs are suitable investments for both short and long-term.

On the SGX, there are currently 35 ETFs for you to choose from, covering the major markets in Asia and around the world (E.g. ASEAN, China, Eastern Europe, India, Japan, Korea, Malaysia, Singapore, Taiwan, U.S, Vietnam, etc), as well as Gold and even Singapore bonds. For more information, you can browse the SGX ETF site or read the SGX’s investor guide in English or Chinese.

How to invest in ETFs?

You need an account with any Singapore stock broker to buy or sell ETFs. Most will allow you to do so over the Internet once you have an account. Select a broker from the full SGX list here. Within this list, many brokers welcome retail investors and some examples include DBS Vickers, Lim & Tan, OCBC Securities and Phillip Securities.