4 Reasons to Invest in the STI ETF
By Alvin Chow (guest contributor)
Does it make sense to invest in the Straits Times Index Exchange Traded Fund (STI ETF)? I believe so, and have listed four reasons below why I think it makes sense to do so.
1. Low cost – management fee and sales charge = less than 1% per year
If you understand compound interest and its effect, you would know that your investment capital can grow exponentially. Likewise, if compound interest can work for you, it can work against you as well. I am talking about fund management fees. They have eroding effects too. It makes a lot of sense to spend as little as possible for fund fees. This is an important criteria to think about when you invest in any funds.
The STI ETF currently charges about a 0.3% management fee, compared to similar unit trusts which charged between 0.75% to 1.5%. This means that you have 100% to 500% of savings right from the start! And this has not factored in the compounding effect.
Talking about sales charges, Fundsupermart currently charges 1.25% for unit trusts and when you buy the STI ETF from a broker, you are typically charged 0.18% to 0.28%. If you just buy a lot which costs you $3,000 and the minimum brokerage fee is $25, your percentage cost would be 0.83%, still lower than the unit trust’s sales charge.
2. Benefit from the growing Singapore economy
As a Singaporean, I am happy where I am as I see Asia as an emerging affluent continent. Singapore, being a business hub, would likely flourish with Asia. I have faith in the economy and hence, buying into Singapore companies is one of the best ways to participate in the growth of Asia.
We have many established companies that have begun expanding their influence in Asia and other parts of the world. Giants like Singtel, KepCorp, SembCorp, DBS, UOB, etc, are well managed and financially sound (I am not suggesting these are good stocks to buy, they are just examples to illustrate my point). As Asia grows, I believe they would gain some market share as well. And right now, they have consistent cashflow as they provide services that Singaporeans pay for everyday. To be able to buy into all these companies would require a lot of capital. But with the STI ETF, you would be able to partly own the top 30 companies in Singapore, the bluest chips of all.
3. Good Diversification
The STI has a mathematical methodology to identify the top 30 companies in Singapore. There will be a periodic review of the constituent stocks and any replacement of the top 30 will then be effected. The STI ETF would track this index closely, and make adjustments accordingly. As such, you would always buy into the top 30 companies at any one time. You do not rely on any single company for investment growth. And these 30 companies cover many industries and sectors. These are forms of diversification. This is especially important if you do not know how to pick stocks.
4. Buy the index if you cannot beat it
It has been said that most fund managers cannot beat the benchmark index. Is it true? Kay from Moneytalk did a comparison between the STI ETF and the similar unit trusts. Taking the dividends from STI ETF into consideration (without factoring the fund costs for all funds), the STI ETF indeed outperformed the fund managers. There is a saying, “if you can’t beat them, join them”! If the fund managers cannot beat the index, it would be wiser to buy something that replicates it closely – the STI ETF.
Compared to unit trusts, you can buy the STI ETF at a cheaper rate and have a potential higher return. To me, it isn’t a difficult choice. Another important thing I want to warn you about is that you still have to buy at the right time. Do not expect to buy the STI ETF at the height of a bull market and expect to see profits. Timing is important. To end off I would like to quote Warren Buffett: “Be fearful when others are greedy and be greedy when others are fearful.”
By guest contributor Alvin Chow, who blogs at Big Fat Purse, a Singapore personal finance blog. Posted via www.MoneyMatters.sg, your guide on how to make more money, save smarter, invest intelligently, and enjoy your money like a pro. Click here to get our free report on what you must know about financial freedom.
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