Want to Invest in SGX's Specified Investment Products (SIPs)? Here's What You Should Know

As investors, you would be familiar with commonly-discussed investments such as Singapore Savings Bond (SSB), regular shares savings plan (RSSP), exchange-traded funds (ETFs), and stocks.

Those investments also have a generally lower barrier to access. 

However, beyond those instruments, there’s a group of products known as Specified Investment Products (SIPs) that you may be interested in.

SIPs have stricter access requirements to ensure investors understand what they are investing in. 

But fret not, here’s how you can qualify to trade SIPs. 

This is a sponsored post written in collaboration with Singapore Exchange (SGX) to promote investing literacy among Singaporeans. Do follow SGX on Telegram (Search: SGX Invest) to keep up with latest news on the Singapore stock market!

TL;DR: Everything You Need to Know About Specified Investment Products (SIPs)

Here’s a summary of the article for those who are time-starved: 

Specified Investment Products (SIPs) are financial products that generally have features and risks that can be more complex for retail customers to understand.

Examples of SIPs listed on SGX are Daily Leveraged Certificates (DLCs), Structured Warrants, Leveraged and Inverse Products, and synthetic Exchange-Traded Funds (ETFs).

To qualify to trade SIPs listed on SGX, you will need to satisfy at least one criteria out of three (educational qualifications, working experience, or investment experience; exact requirements listed towards the end of the article). 

If you do not satisfy any of the three criteria, but still wish to trade SIPs, you can take the SGX SIP Online Education Module and inform your broker once it’s completed. 

SGX SIP Online Education Module

What Are SIPs?

Specified Investment Products (SIPs) are financial products that generally have features and risks that can be more complex for retail customers to understand.

There are two types of SIPs: those that are listed on the SGX and those that are unlisted.

The opposite of a SIP is the Excluded Investment Product (EIP). 

Since 1 January 2012, the Monetary Authority of Singapore (MAS) has made financial institutions that act as intermediaries for such products to assess whether a retail customer has the required knowledge or experience to understand the features and risks of a SIP before offering the product.

Understanding Some of the SIPs

Of the SIPs listed above, let’s explore three of the more popular types in slightly more detail. 

Daily Leveraged Certificates (DLCs)

DLCs are financial instruments issued by third-party financial institutions, such as investment banks.

These financial products offer investors fixed leverage of up to seven times of the daily performance of the underlying asset like equity indices (e.g. Singapore’s Straits Times Index and Hong Kong’s Hang Seng Index) or a single stock (e.g. DBS Group Holdings Ltd and Tencent Holdings Ltd). 

For example, if the underlying asset moves by 1% from its closing price of the previous trading day, the value of a 3x DLC will move by 3% while that of a 7x DLC will move by 7%.

For each underlying and leverage level, there is a long and short DLC available. Investors who are bullish on the stock can therefore buy the long DLC to profit from rising prices while investors who are bearish can buy the short DLC to benefit from falling prices.

Structured Warrants 

Another type of financial derivative issued by a third-party financial institution is structured warrants. 

Those who hold structured warrants have the right, but not the obligation, to buy or sell an underlying asset at a pre-determined price either on or before the expiry date. 

Structured warrants can come in two forms: call warrants or put warrants.

Call warrants benefit from an upward price movement in the underlying asset, while put warrants benefit from a downward trend. 

Underlying assets may be a stock or an index.

Leveraged and Inverse Products (L&I Products)

L&I Products aim to deliver a daily return that is based on a multiple or opposite of the daily return of the underlying index that is tracked.

It is suitable for sophisticated investors who manage their portfolios on a short-term basis and these instruments are not recommended as long-term investments.

Since the products have a leverage element to them, both the losses as well as the gains are multiplied.

The benefit of using leveraged products include having magnified daily returns and bigger investment exposure to a particular index but with lesser capital. 

On the other hand, by using inverse products, traders can take a short position to profit from a fall in the value of an underlying index. The products also help to hedge an overall long portfolio. 

Synthetic Exchange-Traded Funds (ETFs)

Exchange-traded funds (ETFs) are open-ended investment funds that mimic the performance of an underlying asset.

ETFs have two common types of index replication method, and they are:

1. Direct replication; and
2. Synthetic replication. 

The direct method is the more commonly-known replication method.

It replicates the performance of an index by investing in the index’s constituents at similar proportions to the index.

Such ETFs are also known as cash-based ETFs or physically-replicated ETFs.

On the other hand, an ETF with synthetic replication uses derivative instruments or over-the-counter (OTC) transactions such as swaps and futures to replicate the index’s performance without directly holding the underlying assets.

Examples of synthetic ETFs available on SGX include Xtrackers-FTSE Vietnam Swap UCITS ETF, Xtrackers MSCI Indonesia Swap UCITS ETF, and LYXOR ETF MSCI Emerging Markets.

Only synthetic ETFs fall under the SIP framework since they are more complex and contain higher risk. Investors can make use of the SGX ETF Screener to find out which ETFs fall under SIP.

Why Do People Trade SIPs?

As we have seen, SIPs are not for everyone since there are stricter access requirements. 

Investors may choose to trade SIPs as they have a higher risk appetite and have the right knowledge or experience.

They might also want to leverage their capital to capture higher profits, possibly within a very short period of time. 

If you feel SIPs are not for you but still want to grow your money, you can look at generally safer and lower-risk instruments such as stocks, REITs or cash-based ETFs. 

If you feel you are suited to trade SIPs, do read on…

How Should You Get Started on SIPs? 

To be able to trade SIPs, you may approach your brokers to complete the Customer Account Review (CAR).

You will need to satisfy at least one of the following three criteria: