Friday, October 11, 2013

SPDR Straits Times Index ETF: Reclassification gives retail investors access to blue-chip Singapore play

Monday, 07 October 2013 16:23
The recent reclassification of the SPDR Straits Times Index ETF (SPDR STI ETF) as an excluded investment product (EIP) has made this ETF more accessible to retail investors. And as far as ETFs go, this is one that merits a closer look. Formerly known as the streetTracks STI ETF, the SPDR STI ETF was the first ETF to be established locally. Today, it is among the two most actively traded and most liquid of the Singapore equity ETFs listed on the Singapore Exchange.
Between Aug 25 and Sept 26, it had a market depth value of $311,548, only marginally behind the Nikko AM Singapore STI ETF’s market depth value of$353,165. Market depth value is a daily average measure of liquidity in the market. It also has the tightest trading spreads, averaging 1.5 ticks. Liquidity and trading spreads determine how easy it is for investors to buy and sell ETFs, and the price or return they can get. The ETF trades in board-lot sizes of 1,000 units.

The SPDR STI ETF also has the lowest expense ratio among local equity ETFs, at just 0.3%. At $3.20 a unit, the ETF currently has a dividend yield of 2.5% and is trading at 10.5 times earnings and 1.5 times book value. It is also the only Singapore equity ETF available under the CPF Investment Scheme, which allows investors to use their CPF funds to invest in products approved under the scheme.

Christoffer Moltke-Leth, head of client trading at Saxo Capital Markets Singapore, says the ETF is a low-risk way for investors to participate in the local equity market. “When you’re investing in blue-chip stocks, it’s hard for your money to get an edge because it’s so hard to know more than what the market knows. With the SPDR STI ETF, you get a broad exposure to the Singapore market and minimise your risks at the same time,” he says. While investors can also choose to buy individual holdings on the STI, Moltke-Leth points out that would lead to higher fees and volatility.

The STI has been trending down this year since global equity markets started to prepare for an eventual reduction in the size of the US Federal Reserve’s bond buying programme. Now, with the partial shutdown of the US federal government, sentiment has continued to remain weak. The STI ended 0.9% lower on Oct 2 against a backdrop of uncertainty over the partial shutdown of the US federal government. Banks performed poorly, with the share prices of DBS Group Holdings recording a 1.8% drop to $16.14, United Overseas Bank falling 1.2% to $20.58 and Oversea-Chinese Banking Corp down 0.8% to $10.22.

About 30% of the SPDR STI ETF is invested in financials. The second- and third-largest sectors are industrial goods and services (15.69%) and real estate (15.11%), respectively. The ETF’s top three holdings are DBS (10.58%), OCBC (10.47%) and Singapore Telecommunications (10.03%).

Analysts expect a rise in interest rates and an exposure to financials may work to investors’ advantage as higher interest rates drive net interest margins for banks and, therefore, boost earnings. Meanwhile, Hon Cheung, managing director of State Street Advisors Singapore, thinks that as Asian markets go, Singapore remains a safe haven. “Singapore is in a better position than its Asian peers, as it is relatively immune from the impact of US tapering and China restructuring. It is also expected to benefit more from the recovery of the US and Europe,” says Cheung.

In any case, the recent underperformance of the STI against Japan, Australia and several other emerging markets will now work to investors’ advantage. “The STI is trading at a very reasonable valuation at 13.2 times earnings and, therefore, you might see the index playing some catch-up in the fourth quarter,” Moltke-Leth says. “It’s a pretty good time to make sure you have some Singapore exposure. I do see the STI being in the range of 3,500, so there is some upside potential for Singapore.”

In January last year, in response to concerns that investors were trading complicated products that they did not fully understand, the Monetary Authority of Singapore (MAS) classified all ETFs, unit trusts, investment-linked insurance policies, currency-linked investments and structured deposits as Specified Investment Products (SIPs).

Retail investors who wanted to transact in these SIPs would have to undergo a Customer Knowledge Assessment with their brokers or financial advisers to demonstrate relevant knowledge or experience to understand their risks and features.

Some market participants criticised the measures, as not all of the SIPs have the same level of complexity. ETFs, for instance, are relatively simple products. In response, MAS has allowed products that meet certain criteria to be exempted from these rules or classified as EIPs. These ETFs are being reclassified gradually. In May, for instance, the Nikko AM Singapore STI ETF and the ABF Singapore Bond Index Fund were reclassified as EIPs. With the addition of the SPDR STI ETF, there are now nine SGX-listed ETFs classified as EIPs.

Cheung says the move to reclassify the SPDR STI ETF is the right one. “Physically replicated ETFs like the SPDR STI ETF are generally well understood by retail investors. And given the transparency we provide in terms of fund objective, performance and holdings, along with its real-time pricing on the SGX, we believe retail investors should be able to access them with greater ease.”

State Street Advisors Singapore is the issuer of the SPDR series of ETFs.

Investors can probably look forward to more reclassifications of ETFs, and that will open up more opportunities for investing in new markets and broadening their portfolios.

Publish date: 07/10/13

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