On The Right Track – Gaining Exposure To Singapore’s Economic Future

Since its launch 20 years ago, the SPDR STI ETF has attracted an ever-growing investor base who have helped propel assets under management to more than S$1.6 billion. In this article, we look more closely at the factors underpinning the ETF’s appeal.

An investor who purchases a unit of the SPDR STI ETF gains exposure to the largest 30 stocks traded on the Straits Times Index (STI). As the investment manager of the ETF, we buy and sell shares to mirror the constituent stock weights in the STI closely. Initially, this may appear straightforward, but that’s not strictly the case. We must contend with managing corporate actions, such as stock splits, rights issues, dividends, and, most importantly, changes to the constituents that make up the STI.

This broad exposure to Singapore’s top companies and operational efficiency of investing through a single trade are just some of the factors that appeal to investors of the SPDR STI ETF. Other benefits include using the ETF for income generation or capital growth, liquidity, and a tight bid/ask spread that results in lower transaction costs and total cost of ownership.

Building a diversified portfolio

A core-satellite portfolio strategy seeks the broad market return as the “core” portion of a portfolio, and seeks additional diversification and returns in a “satellite” strategy which adds non-core market exposures.

With exposure spanning 30 stocks, the SPDR STI ETF’s investment performance is never overly dependent on the fortunes of a few strategic holdings – a concept known as stock-specific risk. For this reason, some participants use the ETF to maintain a “core” overall market exposure. Suppose an investor is particularly attracted to an individual stock, sector, or theme. In that case, they can also invest in it separately as a “satellite” position.  Such diversification between “core” and “satellite” strategies has the benefit of blending the general market risk of the core portfolio with the potentially riskier or more concentrated satellite portfolio exposures.

Out with the old and in with the new

As time passes, new companies will inevitably emerge while others fade. Think of the comparative fortunes of the well-known tech giants that have come to dominate the past decade. Investors sometimes don’t foresee the success of new businesses and cling to names that ultimately get left behind. An investor who harnesses the SPDR STI ETF doesn’t need to worry about the future shape of the STI and act on these ebbs and flows, as their underlying exposures change in tandem with the index. Over the past 20 years, in line with the development of Singapore’s economy, the STI has increased exposure to Financials and Real Estate sector holdings. 

Simplicity at its core

It’s also easy to purchase exactly the amount of exposure required because an ETF listed on the SGX can now be traded in multiples of one unit. This also makes it straightforward to include the SPDR STI ETF as part of a regular investment plan, which contrasts favorably with many other equity-fund investments requiring a relatively large minimum transaction.

Of course, investors can also utilize their regular broker, as the SPDR STI ETF trades on the SGX in the same way as a common stock. It also has added appeal from a Singapore viewpoint, given it is an eligible investment under the Central Provident Fund and Voluntary Supplementary Retirement schemes.

Furthermore, the ability to regularly invest in an ETF means that investors benefit from a ‘smoothing’ of portfolio volatility. Buying over time at different prices helps navigate the ups and downs that all markets experience. This process is commonly known as dollar-cost averaging.

Income or capital 

Investors who require a regular income can choose to receive their distributions in cash, with these paid twice yearly in February and August. Those who prefer capital growth over income can choose to reinvest their distributions back into the ETF. Compared to other global markets, the Straits Times Index also offers one of the highest dividend yield. 

Figure 1: Dividend Yield of Straits Times Index vs. Selection of Global Market Indices

Market Index Dividend Yield (%)
Singapore Straits Times Index 3.36
Developed Asia-Pacific FTSE Developed Asia Pacific 2.73
Emerging Markets FTSE Emerging  2.69
Asia-Pacific  FTSE APAC 2.48
China A FTSE China A50 2.19
All-World FTSE All-World 1.93

Source: FTSE Russell, March 31, 2022. Index returns are unmanaged and do not reflect the deduction of any fees or expenses. Index returns reflect all items of income, gain and loss and the reinvestment of dividends and other income as applicable.

A prime location

Despite the strains caused by pandemic-related restrictions and, more broadly, global economic pressures, Singapore’s outlook is positive. Companies listed on the Straits Times Index benefit from a prime geographical location and are strongly linked to the fortunes of a region that is ripe with opportunities. In our recent Global Market Outlook , we highlight the fact that Southeast Asia’s businesses are yet to fully benefit from the post-COVID reopening. As such, growth is likely to accelerate in 2022 and investors can position themselves to capture Singapore’s development through the SPDR STI ETF

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