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A Singaporean’s Guide to STI ETF: Nikko AM vs SPDR STI ETF

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autopilot trading.sg/wp-content/uploads/2019/01/300119-difference-between-ES3-and-G3B-768×402.png” class=”webfeedsFeaturedVisual wp-post-image” alt=”The Difference Between SPDR STI ETF and Nikko AM STI ETF” style=”display: block; margin-bottom: 5px; clear:both;max-width: 100%;” srcset=”https://i1.wp.com/blog.autopilot trading.sg/wp-content/uploads/2019/01/300119-difference-between-ES3-and-G3B.png?resize=768%2C402&ssl=1 768w, https://i1.wp.com/blog.autopilot trading.sg/wp-content/uploads/2019/01/300119-difference-between-ES3-and-G3B.png?resize=300%2C157&ssl=1 300w, https://i1.wp.com/blog.autopilot trading.sg/wp-content/uploads/2019/01/300119-difference-between-ES3-and-G3B.png?resize=1024%2C536&ssl=1 1024w, https://i1.wp.com/blog.autopilot trading.sg/wp-content/uploads/2019/01/300119-difference-between-ES3-and-G3B.png?w=1200&ssl=1 1200w” sizes=”(max-width: 640px) 100vw, 640px” data-attachment-id=”23298″ data-permalink=”https://blog.autopilot trading.sg/spdr-sti-etf-vs-nikko-am-sti-etf/300119-difference-between-es3-and-g3b/” data-orig-file=”https://i1.wp.com/blog.autopilot trading.sg/wp-content/uploads/2019/01/300119-difference-between-ES3-and-G3B.png?fit=1200%2C628&ssl=1″ data-orig-size=”1200,628″ data-comments-opened=”0″ data-image-meta='{“aperture”:”0″,”credit”:””,”camera”:””,”caption”:””,”created_timestamp”:”0″,”copyright”:””,”focal_length”:”0″,”iso”:”0″,”shutter_speed”:”0″,”title”:””,”orientation”:”0″}’ data-image-title=”The Difference Between SPDR STI ETF and Nikko AM STI ETF” data-image-description=”

The Difference Between SPDR STI ETF and Nikko AM STI ETF

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Imagine this.

You’re ready to start investing and wish to buy into the Straits Times Index (SGX: ^STI). But you don’t have enough capital and you realise that it’ll take a lot of effort to ensure that your portfolio replicates the exact index weights as prescribed.

You do a little research on autopilot trading and you:

  1. Believe that index investing is a good fit for your investment strategy and time horizon
  2. Know that the STI ETF is a simple way to invest in Singapore’s top 30 companies
  3. Learnt that the dividends from buying the STI ETF can pay for your lunch for 9 months
  4. Understand the difference between Dollar Cost Averaging (DCA) and Lump Sum Investing

But wait… You also discover that there are two Exchange-traded Funds (ETFs) listed on the Singapore stock exchange to choose from: SPDR STI ETF (SGX: ES3) and 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? We do a little analysis and ask some pertinent questions to help you make a decision.

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 are in their fund size, expense ratio, and tracking error:

  • The difference in fund size between SPDR STI ETF and Nikko AM STI ETF is sizeable, 692.35 million and 247.11 million respectively. But larger fund size is NOT indicative of better performance.
  • SPDR STI ETF’s expense ratio is 0.30% while Nikko AM STI ETF clocks in at 0.33%. Although 0.03% may seem paltry, a higher expense always eats into an investor’s returns.
  • In terms of tracking error, SPDR STI ETF does a better job at 0.0415%, as compared to Nikko AM STI ETF’s 0.15%. Meaning that State Street Global Advisor’s offering is able to match the returns of the Straits Times Index more closely.

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.

autopilot trading.sg/spdr-sti-etf-vs-nikko-am-sti-etf/piggy-bank-4/” data-orig-file=”https://i0.wp.com/blog.autopilot trading.sg/wp-content/uploads/2019/01/piggy-bank.png?fit=128%2C128&ssl=1″ data-orig-size=”128,128″ data-comments-opened=”0″ data-image-meta='{“aperture”:”0″,”credit”:””,”camera”:””,”caption”:””,”created_timestamp”:”0″,”copyright”:””,”focal_length”:”0″,”iso”:”0″,”shutter_speed”:”0″,”title”:””,”orientation”:”0″}’ data-image-title=”Piggy Bank” data-image-description=”

Piggy Bank

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Fund Size

SPDR STI ETF’s fund size is 692.35 million, whereas Nikko AM STI ETF clocks in at 247.11 million (data from the respective fund’s fact sheet dated 31 Dec 2018). Even though SPDR STI ETF is 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?”

Sure.

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 (which brings us neatly to the next difference).

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.

autopilot trading.sg/spdr-sti-etf-vs-nikko-am-sti-etf/expensive-2/” data-orig-file=”https://i2.wp.com/blog.autopilot trading.sg/wp-content/uploads/2019/01/expensive-1.png?fit=128%2C128&ssl=1″ data-orig-size=”128,128″ data-comments-opened=”0″ data-image-meta='{“aperture”:”0″,”credit”:””,”camera”:””,”caption”:””,”created_timestamp”:”0″,”copyright”:””,”focal_length”:”0″,”iso”:”0″,”shutter_speed”:”0″,”title”:””,”orientation”:”0″}’ data-image-title=”Coins” data-image-description=”

Coins

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Expense Ratio

Even though both ETFs have much lower expense ratios as compared to say… Unit trusts, the ETF managed by Nikko Asset Management (0.33%) has a slightly higher expense ratio than State Street’s offering (0.3%). 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:

autopilot trading.sg/spdr-sti-etf-vs-nikko-am-sti-etf/expense-ratio-difference/” data-orig-file=”https://i2.wp.com/blog.autopilot trading.sg/wp-content/uploads/2019/01/Expense-Ratio-Difference.png?fit=660%2C475&ssl=1″ data-orig-size=”660,475″ data-comments-opened=”0″ data-image-meta='{“aperture”:”0″,”credit”:””,”camera”:””,”caption”:””,”created_timestamp”:”0″,”copyright”:””,”focal_length”:”0″,”iso”:”0″,”shutter_speed”:”0″,”title”:””,”orientation”:”0″}’ data-image-title=”Chart Showing Expense Ratio Difference” data-image-description=”

Chart Showing Expense Ratio Difference

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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.

This conveniently brings us to the next difference.

autopilot trading.sg/spdr-sti-etf-vs-nikko-am-sti-etf/warning-3/” data-orig-file=”https://i0.wp.com/blog.autopilot trading.sg/wp-content/uploads/2019/01/warning.png?fit=128%2C128&ssl=1″ data-orig-size=”128,128″ data-comments-opened=”0″ data-image-meta='{“aperture”:”0″,”credit”:””,”camera”:””,”caption”:””,”created_timestamp”:”0″,”copyright”:””,”focal_length”:”0″,”iso”:”0″,”shutter_speed”:”0″,”title”:””,”orientation”:”0″}’ data-image-title=”Error” data-image-description=”

Error

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Tracking Error

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 high tracking error will eat into an investor’s returns.

For reference (data from the respective fund’s fact sheet dated 31 Dec 2018):

  • SPDR STI ETF has an annualised tracking error of 0.0451%
  • Nikko AM STI ETF’s is 0.15%

Why You Shouldn’t Buy STI ETFs

While there’s a lot of literature out there telling you to buy STI ETFs, we’re going to play devil’s advocate here and give you a few reasons why you shouldn’t.

autopilot trading.sg/spdr-sti-etf-vs-nikko-am-sti-etf/graph/” data-orig-file=”https://i2.wp.com/blog.autopilot trading.sg/wp-content/uploads/2019/01/graph.png?fit=128%2C128&ssl=1″ data-orig-size=”128,128″ data-comments-opened=”0″ data-image-meta='{“aperture”:”0″,”credit”:””,”camera”:””,”caption”:””,”created_timestamp”:”0″,”copyright”:””,”focal_length”:”0″,”iso”:”0″,”shutter_speed”:”0″,”title”:””,”orientation”:”0″}’ data-image-title=”Line Graph Upward Trend” data-image-description=”

Line Graph Upward Trend

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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.

autopilot trading.sg/spdr-sti-etf-vs-nikko-am-sti-etf/screenshot-2019-01-30-at-11-26-19-am/” data-orig-file=”https://i2.wp.com/blog.autopilot trading.sg/wp-content/uploads/2019/01/Screenshot-2019-01-30-at-11.26.19-AM.png?fit=1682%2C650&ssl=1″ data-orig-size=”1682,650″ data-comments-opened=”0″ data-image-meta='{“aperture”:”0″,”credit”:””,”camera”:””,”caption”:””,”created_timestamp”:”0″,”copyright”:””,”focal_length”:”0″,”iso”:”0″,”shutter_speed”:”0″,”title”:””,”orientation”:”0″}’ data-image-title=”STI vs NASDAQ And Hang Seng” data-image-description=”

STI vs NASDAQ And Hang Seng

” data-medium-file=”https://i2.wp.com/blog.autopilot trading.sg/wp-content/uploads/2019/01/Screenshot-2019-01-30-at-11.26.19-AM.png?fit=300%2C116&ssl=1″ data-large-file=”https://i2.wp.com/blog.autopilot trading.sg/wp-content/uploads/2019/01/Screenshot-2019-01-30-at-11.26.19-AM.png?fit=640%2C248&ssl=1″ class=”aligncenter size-large wp-image-23250″ src=”https://i2.wp.com/blog.autopilot trading.sg/wp-content/uploads/2019/01/Screenshot-2019-01-30-at-11.26.19-AM.png?resize=640%2C248&ssl=1″ alt=”STI vs NASDAQ And Hang Seng” width=”640″ height=”248″ srcset=”https://i2.wp.com/blog.autopilot trading.sg/wp-content/uploads/2019/01/Screenshot-2019-01-30-at-11.26.19-AM.png?resize=1024%2C396&ssl=1 1024w, https://i2.wp.com/blog.autopilot trading.sg/wp-content/uploads/2019/01/Screenshot-2019-01-30-at-11.26.19-AM.png?resize=300%2C116&ssl=1 300w, https://i2.wp.com/blog.autopilot trading.sg/wp-content/uploads/2019/01/Screenshot-2019-01-30-at-11.26.19-AM.png?resize=768%2C297&ssl=1 768w, https://i2.wp.com/blog.autopilot trading.sg/wp-content/uploads/2019/01/Screenshot-2019-01-30-at-11.26.19-AM.png?w=1280&ssl=1 1280w” sizes=”(max-width: 640px) 100vw, 640px” data-recalc-dims=”1″>

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 to mitigate this? Maybe consider diversifying into a global or regional index…

autopilot trading.sg/spdr-sti-etf-vs-nikko-am-sti-etf/shopping-basket/” data-orig-file=”https://i0.wp.com/blog.autopilot trading.sg/wp-content/uploads/2019/01/shopping-basket.png?fit=128%2C128&ssl=1″ data-orig-size=”128,128″ data-comments-opened=”0″ data-image-meta='{“aperture”:”0″,”credit”:””,”camera”:””,”caption”:””,”created_timestamp”:”0″,”copyright”:””,”focal_length”:”0″,”iso”:”0″,”shutter_speed”:”0″,”title”:””,”orientation”:”0″}’ data-image-title=”Shopping Basket” data-image-description=”

Shopping Basket

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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 (%)
Ascendas REIT A17U 2.6
CapitaCom Trust C61U 2.2
CapitaLand C31 3.4
CapitaMall Trust C38U 2.1
CityDev C09 1.4
ComfortDelGro C52 1.6
Dairy Farm International Holdings D01 1.4
DBS D05 15.2
Genting Sing G13 2.1
Golden Agri-Res E5H 0.5
HongkongLand USD H78 3.6
HPH Trust USD NS8U 0.7
Jardine C&C C07 1.4
JMH USD J36 6.2
JSH USD J37 3.6
Keppel Corp BN4 3.6
OCBC Bank O39 11.7
SATS S58 1.3
Sembcorp Ltd U96 1.1
SIA C6L 1.9
SingTel Z74 8.0
SGX S68 2.7
SPH T39 1.3
ST Engineering S63 1.9
ThaiBev Y92 1.8
UOB U11 10.4
UOL U14 1.4
Venture V03 1.5
Wilmar Intl F34 2.0
YZJ Shipbldg SGD BS6 1.3

In fact, DBS Group Holdings, Oversea-Chinese Banking Corporation, and United Overseas Bank together account for 37.3% of the STI.

This also means that both STI ETFs have an overweight focus on local banks and financial institutions. Which also means that in terms of diversification of risk, you should be a little worried if STI is your only investment.

autopilot trading.sg/spdr-sti-etf-vs-nikko-am-sti-etf/slow/” data-orig-file=”https://i2.wp.com/blog.autopilot trading.sg/wp-content/uploads/2019/01/slow.png?fit=128%2C128&ssl=1″ data-orig-size=”128,128″ data-comments-opened=”0″ data-image-meta='{“aperture”:”0″,”credit”:””,”camera”:””,”caption”:””,”created_timestamp”:”0″,”copyright”:””,”focal_length”:”0″,”iso”:”0″,”shutter_speed”:”0″,”title”:””,”orientation”:”0″}’ data-image-title=”Slow Clock” data-image-description=”

Slow Clock

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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:

  1. Select and buy a low-cost index fund that tracks the market
  2. 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 a NASDAQ ETF which tracks a global index consisting of over 4,000 listings from all over the world (including a sprinkling of Singapore companies)?

That way, you don’t have to choose a “market” since you’ve essentially chosen a global one, and you’re appropriately diversified too.

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, and dividend withholding tax – all of which will eat into your returns. Or look to Ireland domiciled funds… #justsaying


If Not STI ETFs, What Then?

We’re not saying that STI ETFs don’t have a place in your portfolio, but if you’re going to invest in something shouldn’t you understand what you’re getting into?

You wouldn’t buy a TV just because the salesperson said it’s the “best one in the market”, right?

autopilot trading.sg/spdr-sti-etf-vs-nikko-am-sti-etf/screenshot-2019-01-30-at-9-48-12-am/” data-orig-file=”https://i2.wp.com/blog.autopilot trading.sg/wp-content/uploads/2019/01/Screenshot-2019-01-30-at-9.48.12-AM.png?fit=573%2C602&ssl=1″ data-orig-size=”573,602″ data-comments-opened=”0″ data-image-meta='{“aperture”:”0″,”credit”:””,”camera”:””,”caption”:””,”created_timestamp”:”0″,”copyright”:””,”focal_length”:”0″,”iso”:”0″,”shutter_speed”:”0″,”title”:””,”orientation”:”0″}’ data-image-title=”Sidelook Dog” data-image-description=”

Sidelook Dog

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