A Singaporean's Guide To STI ETF: Nikko AM Vs SPDR STI ETF Which Is Better?
You decide that you’re going to start buying the Straits Times Index (STI).
But you don’t have enough capital and you realise that it’ll take a lot of effort to replicate the index exactly.
You do a little research on Seedly and you:
- Believe that index investing is a good fit for your investment strategy and time horizon
- Know that the STI ETF is a simple way to invest in Singapore’s top 30 companies
- Understand the difference between Dollar Cost Averaging (DCA) and Lump Sum Investing
You also discover that there are two STI Exchange-Traded Funds (ETFs) to choose from:
- SPDR STI ETF (SGX: ES3)
- Nikko AM STI ETF (SGX: G3B)
So what’s the difference between the two STI ETFs? Which is better?
Should you even invest in STI ETFs in the first place?
Let’s find out.
Disclaimer: The information provided here is for discussion purposes only, and should NOT be construed as investment advice. As always, do your due diligence!
TL;DR: What’s The Difference Between SPDR STI ETF Vs Nikko AM STI ETF?
The key differences between the two STI ETFs are in their fund size, expense ratio, and tracking error:
|SPDR STI ETF||Nikko AM STI ETF||What's The Significance?|
|Fund Size||S$783.43 million||S$288.98 million||A larger fund size does not mean better performance.|
|Expense Ratio||0.30%||0.30%||A higher expense ratio will eat into your returns.|
(rolling 1-year tracking)
|A high tracking error potentially means lower returns.
Note: Nikko AM is still young and tracking errors usually revert to the mean over time.
Note: all information cited from the respective fund’s factsheet correct as of 31 Aug 2019.
Have more questions about STI ETFs? Why not ask our friendly community on our Seedly QnA?
The Difference Between SPDR STI ETF And Nikko AM STI ETF
SPDR STI ETF is managed by State Street Global Advisors Singapore Limited, a subsidiary of the third-largest asset manager in the world.
On the other hand, Nikko AM Singapore STI ETF is managed by Nikko Asset Management Asia Limited – one of the largest asset managers in Asia.
Apart from the fact that both STI ETFs are obviously managed by different, reputable fund managers.
Here’re the differences that matter.
SPDR STI ETF’s fund size is S$783.43 million, whereas Nikko AM STI ETF clocks in at S$288.98 million (data from the respective fund’s fact sheet dated 31 Aug 2019).
Even though SPDR STI ETF is almost three times the size of Nikko AM STI ETF, a large fund size doesn’t automatically mean that it’s better.
It just means that SPDR STI ETF:
- Has been around for much longer. It was incepted in 2002 as compared to Nikko AM’s offering, which was only incepted in 2009.
- Is more popular. And rightfully so, because larger funds are usually seen as more stable and are preferred because they can enjoy economies of scale.
If you’re going, “Simi economies of scale? Can explain, please?”
Think of it this way.
All ETFs have an operating expense, and if this expense is spread over a larger asset base like in a larger fund, then it reduces the overall expense ratio.
The bottom line is, you can’t pick a random large-size fund and say that just because it’s large, therefore it must be good.
Conversely, you can’t discredit a smaller fund based on its size, especially if it has good performance.
Back in 2018, the expense ratio for the ETF managed by Nikko AM was 0.33%. That was slightly higher than the expense ratio of State Street’s offering which was 0.30%.
That may not seem like much but any investor worth his or her salt will tell you that higher expense ratios always eat into an investor’s returns.
Assuming you have an initial investment of $10,000 and plan to contribute $1,000 a month for a period of 25 years.
The first fund you choose is growing at 8% per annum, with an expense ratio of 0.3%. While an alternative fund is also growing at 8% per annum, but with an expense ratio of 0.33%. This is what it looks like:
To put it simply, that seemingly small amount of 0.03% amounts to a difference of $4,621 paid in fees over a span of 25 years.
That’s money which could be invested to allow you to accumulate an even larger fund balance (read: more money for your retirement).
When it comes to ETFs, investors are often advised to buy one with the lowest fees.
However, this may not always be the most sensible option especially if the “cheaper” fund does not track the index as well as it’s supposed to.
As of the respective fund’s fact sheets dated 31 Aug 2019, both ETF’s expense ratios are the same at 0.30%.
An ETF’s tracking error tells us how much its performance deviates from the underlying index’s actual performance.
If the tracking error is high, it means that investors will not get the full gains delivered by the index.
Simply put, a higher tracking error potentially means lesser returns.
For reference (data from the respective fund’s fact sheet dated 31 Aug 2019):
- SPDR STI ETF has an annualised tracking error of 0.0453% (rolling 1-year tracking)
- Nikko AM STI ETF’s is 0.16% (3-year annualised)
However, even though Nikko AM STI ETF fared slightly worse in terms of tracking error, it’s probably due to the fund having a shorter period of existence as compared to SPDR STI ETF.
This error will revert to the mean over a long period of time.
The takeaway here?
It’s best to give Nikko AM STI ETF a few more years to stabilise their tracking error before making a judgement.
So… How Do I Start Buying STI ETFs?
There’re many ways which you can do so. And we’ve written plenty of articles explaining how.
If you’re a beginner investor, one of the easiest ways would be through a Regular Share Savings (RSS) Plan.
Assuming you wish to buy SPDR STI ETF every month, you can do it through PhillipCapital’s Share Builders Plan.
And if you want to buy Nikko AM STI ETF instead, you can do it through OCBC’s Blue Chip Investment Plan or DBS Invest-Saver.
Note: different RSS Plans allow you to buy different share counters.
The Case For Why You Shouldn’t Buy STI ETFs
While there’s a lot of literature (including ours) out there telling you to buy STI ETFs, I’m going to play devil’s advocate here and give you a few reasons why you shouldn’t.
Are You Backing The Right Horse?
The chart below plots the performance of the STI against a global index like the NASDAQ and a regional index like the Hang Seng, over a span of 30 years.
Without going into specifics, it’s obvious that if you bought and held an ETF that tracked the correct index, you would be rich AF today.
Even if we take into account the dip in the market in the latter half of 2018, it’s evident that an ETF that tracks a global or regional index outperforms the STI by as much as 20 times.
How do we mitigate this?
Maybe consider diversifying into a global or regional index… of course, there’s risk and volatility to contend with (I mean, have you seen what’s happening in the US and Hong Kong right now?).
Diversification? What Diversification?
If you look closely at the STI, you’ll notice that it is heavily weighted with financials.
|Constituent Name||SGX Identifier||STI Weight (%)|
|DBS Group Holdings Limited||D05||15.8|
|Oversea-Chinese Banking Corporation Limited||O39||11.1|
|United Overseas Bank Limited||U11||10.7|
|Singapore Telecommunications Limited||Z74||8.5|
|Jardine Matheson Holdings Limited||J36||5.0|
|Keppel Corporation Limited||BN4||3.6|
|Ascendas Real Estate Investment Trust||A17U||3.0|
|Jardine Strategic Holdings Limited||J37||2.9|
|Singapore Exchange Limited||S68||2.9|
|Hongkong Land Holdings Limited||H78||2.8|
|CapitaLand Commercial Trust||C61U||2.4|
|CapitaLand Mall Trust||C38U||2.3|
|Mapletree Commercial Trust||N2IU||2.2|
|Thai Beverage Public Company Limited||Y92||2.2|
|Wilmar International Limited||F34||2.2|
|Singapore Technologies Engineering Ltd||S63||2.1|
|Genting Singapore Limited||G13||1.8|
|Singapore Airlines Limited||C6L||1.8|
|ComfortDelGro Corporation Limited||C52||1.7|
|City Developments Limited||C09||1.5|
|UOL Group Limited||U14||1.5|
|Venture Corporation Limited||V03||1.5|
|Jardine Cycle & Carriage Limited||C07||1.2|
|Singapore Press Holdings Limited||T39||1.1|
|Yangzijiang Shipbuilding (Holdings) Limited||BS6||1.0|
|Dairy Farm International Holdings Limited||D01||0.9|
|Sembcorp Industries Limited||U96||0.9|
|Golden Agri-Resources Ltd||E5H||0.4|
In fact, DBS Group Holdings, Oversea-Chinese Banking Corporation, and United Overseas Bank together account for 37.6% of the STI.
Which means that both STI ETFs have an overweight focus on local banks and financial institutions.
This also means that in terms of diversification of risk, you should be a little concerned if STI is your only investment.
Is It Really Passive Investing?
Many people would associate investing in STI ETFs as passive investing.
But let’s look at what really constitutes a passive investing strategy:
- Select and buy a low-cost index fund that tracks the market
- Continue buying for the foreseeable future
So far so good.
The idea of passive investing is that investors will take the market return – otherwise known as the median performance of all stocks in a given market.
But how do you know which “market” to choose?
With thousands of ETFs tracking various “markets”, wouldn’t ETF investing require you to actively choose a “market” to invest in?
So why choose STI ETFs in the first place?
Why not consider something like an ETF that tracks the NASDAQ, which would give you a more globally diversified portfolio? That way, you don’t have to choose a “market”.
However, you should note that there’s no straightforward way to buy a global ETF in Singapore.
Your best bet would be through a brokerage, but that also exposes you to:
- brokerage fees
- foreign exchange rates
- dividend withholding tax, and many more
all of which will eat into your returns.
Or you could look at Ireland-domiciled funds… #justsaying
If Not STI ETFs, What Then?
I’m not saying that STI ETFs don’t have a place in your portfolio.
But if you’re going to invest in something, it’s best if you know what you’re getting yourself into.
After all, you wouldn’t buy a TV just because the salesperson said it’s the “best one in the market”… right?
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