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5 things to know before you invest in the Phillip SING Income ETF

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A year ago, Phillip Capital Management, along with Lion Global Investors, launched the Lion-Phillip S-REIT ETF. The ETF aimed to give investors a way to invest in a diversified basket of Singapore REITs (S-REITs) which paid a steady stream of distributions. (At the moment, the average distribution yield for S-REITs is 6.8%.)

The ETF was met with a largely positive response from the market – Lion Global Investors and Phillip Capital Management initially aimed to raise S$40-50 million but exceeded their target when the fund raised over S$100 million last October.

Capitalizing on the Singapore market’s appetite for yield, Phillip Capital Management has now launched the Phillip SING Income ETF. The initial offer period for the ETF will close at 11:00 a.m. on 19 October 2018 before its lists on the Mainboard of the SGX on 29 October 2018.

One problem with chasing high-yield stocks is that it can turn out to be a classic ‘dividend trap’. Yields are high only because the share price has fallen due to business distress. And eventually the company has to cut or suspend its dividend because of its deteriorating fundamentals.

To avoid the so-called dividend trap, the Phillip SING Income ETF aims to tracks the Morningstar Singapore Yield Focus Index which uses a quantitative, rules-based methodology to select the top 30 stocks listed on the SGX that are able to pay a sustainable and growing dividend.

So does the methodology work? Here are five things to know before you invest in the Phillip SING Income ETF.

1. More defensive than the STI

According to the Morningstar Singapore Yield Focus Index, these are the top 30 high-quality, dividend stocks listed in Singapore:

Index Constituents Portfolio Weight
Singapore Telecommunications 10.2%
DBS Group 8.5%
OCBC Bank 7.9%
UOB Bank 7.5%
Singapore Exchange 5.8%
ST Engineering 5.2%
SATS 5.1%
CapitaLand Commercial Trust 5.4%
Hongkong Land 4.7%
CapitaLand Mall Trust 5.2%
Mapletree Commercial Trust 4.7%
Netlink NBN Trust 4.1%
Dairy Farm International 3.5%
Parkway Life REIT 2.3%
SIA Engineering 2.2%
Sheng Siong Group 2.1%
M1 1.6%
Manulife US REIT 1.6%
Keppel Infrastructure Trust 1.6%
OUE Hospitality Trust 1.5%
United Engineers 1.4%
Haw Par Corp 1.4%
StarHub 1.2%
First REIT 1.0%
AIMS AMP Capital Industrial REIT 0.9%
Hong Leong Finance 0.9%
Raffles Medical Group 0.8%
Frasers Hospitality Trust 0.5%
Silverlake Axis Trust 0.4%

Source: Phillip Capital Management, Bloomberg

The maximum weight per security is 10% and the index is rebalanced every six months.

As you can see, you’ll notice many familiar names – some of which you can also find on the Straits Times Index (STI) — including the three local banks, DBS, OCBC, and UOB; telcos like Singtel and StarHub; and some of the larger companies in Singapore like ST Engineering and SGX. Dairy Farm International, which recently replaced StarHub in the STI, is also included.

However, unlike the STI which simply weighs its constituents based on their market caps, the Singapore Yield Focus Index selects and weighs its components according to their composite factor scores which comprises the quantitative moat score, financial health factor, and trailing 12-month dividend yield.

This is why, compared to the STI, the Singapore Yield Focus Index is more heavily weighted in the REIT (24%) and telecommunications (17%) sectors which tend to be more defensive and pay steady dividends.


Source: Phillip Capital Management, Bloomberg

Source: Phillip Capital Management, Bloomberg

You also see stocks like Sheng Siong Group, Raffles Medical Group, and Silverlake Axis which are too small to be listed on the STI, but are included on the Singapore Yield Focus Index due to their stable dividends.

Do also note that M1 is currently the subject of a privatization offer. If the offer is accepted, M1 will be delisted and replaced in the ETF.

2. Higher returns, but more expensive

  Cumulative Return (2005-2018) Annualised Return (2005-2018) Dividend Yield P/E
Morningstar Singapore Yield Focus Index 234.4% 9.6% 5.01% 16.3
Straits Times Index 113.7% 5.9% 3.47% 11.1
MSCI Singapore 130.3% 6.5% 4.69% 13.1

Source: Phillip Capital Management, Bloomberg

From 2005 to 31 August 2018, the Singapore Yield Focus Index had a cumulative return of 234.4% (inclusive of dividends), compared to the STI which cumulatively returned 113.7%.

The Singapore Yield Focus Index’s trailing 12-month dividend yield is 5.0% — higher than the STI’s yield of 3.47% (as of 5 Oct 2018). This is expected as the Singapore Yield Focus Index is supposed to be weighted towards higher yields anyway.

Looking from a valuation perspective, the Singapore Yield Focus Index is more expensive with a price/earnings ratio of 16.3 (as at 31 August 2018). In comparison, the STI’s P/E ratio is currently at 11.1.

3. No tax transparency (for now)

Distributions from S-REITs are tax-free for investors. From 1 July 2018, this tax transparency treatment was also extended to ETFs invested in S-REITs. Previously, distributions from S-REITs to ETFs were taxed at 17%, which made investing in S-REIT ETFs tax inefficient.

However, this treatment is not automatic; the fund manager of the ETF must apply for tax transparency status before distributions from S-REITs are tax-exempted. Phillip Capital Management plans to apply for tax transparency status after the ETF is listed. The application process should take around 2-3 months to complete according to Phillip Capital Management co-CIO Linus Lim.

Factoring the 17% withholding tax on S-REIT distributions, the dividend yield for the Phillip SING Income ETF is effectively 4.8%.

4. Tracking error

When it comes to investing in an ETF that tracks an index, you want the ETF to have minimal tracking error. For example, if the index gains 10%, the ETF should likewise grow by a similar amount. The difference between the return of the index and the ETF is called tracking error, and a good fund manager should be able to reduce tracking error to a minimum.

At this point, the Phillip SING Income S-REIT ETF has no tracking error data since it hasn’t launched. However, as a yardstick, the tracking error for the Lion-Phillip S-REIT ETF is currently at around 1% according to Phillip Capital Management senior fund manager Tan Teck Leng.

In comparison, the tracking error of SPDR® Straits Times Index ETF is much lower at 0.0524% (as at 31 August 2018). But we have to note that the constituents of the STI are more liquid, which helps to reduce tracking error.

5. Expense ratio

Another important consideration when investing in an ETF is its expense ratio. In addition to management fees, the fund also has other costs like taxes, legal expenses, and accounting and auditing fees. The lower the expense ratio, the better.

The management fee for the Phillip SING Income ETF is currently 0.40% per annum (with a maximum cap of 0.70%). This is comparable to the SPDR® Straits Times Index ETF which has an expense ratio of 0.30% per annum. However, I would keep a watch out if the expense ratio rises beyond 0.50%.

The fifth perspective

If you’re a passive investor who’s looking for yield and exposure only to Singapore-listed stocks, then the Phillip SING Income ETF is definitely an option for you. It gives you immediate diversification in 30 different stocks and pays a reasonable overall dividend of 5.0% (before cost of fees).

However, if you prefer to construct your own portfolio of dividend stocks and REITs, then doing so might be in your interest since you’ll save on annual fees and most likely receive a higher overall dividend through a less-diversified, more concentrated income portfolio.

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