Two STI ETFs, Different Dividends

One question that you might have when researching on STI ETFs is, why does the dividends differ since both are doing the same thing i.e. tracking Straits Times Index?

SPDR Straits Times Index ETF
Current Price : S$3.46
Dividend : S$0.04 (Date Paid : 19 Feb 2013)
Assets : S$380.46M

Nikko AM Singapore STI ETF
Current Price : S$3.49
Dividend : S$0.035 (Date Paid : 10 May 2013)
Assets : S$130.57M

To put things into perspective, the difference in half-a-cent dividend means for every 1,000 units, you would be getting $5 less in dividends. Let's dig a little further and we'll see one possible reason - expense ratio.

SPDR Straits Times Index ETF
Expense Ratio : 0.30

Nikko AM Singapore STI ETF
Expense Ratio : 0.48

Lower expense, higher dividends? Why is the expense ratio different? Is SPDR Straits Times Index ETF enjoying economies of scale due to it's larger fund size?

Moreover, let's take a look at Bloomberg's profile of each STI ETF, and you will see that their fund holdings proportion are different. With different underlying fund holdings proportion, it makes sense that the dividends will possibly differ as well.

SPDR Straits Times Index ETF (top holding is Singapore Telecommunications 9.956%)
Nikko AM Singapore STI ETF (top holding is Oversea-Chinese Banking Corp 10.223%)

Both ETFs may be tracking STI, but make no mistake about it, they are not the same thing. In this Motley Fool article, it mentioned that Nikko AM Singapore STI ETF will no longer be using financial derivatives, unlike SPDR Straits Times Index ETF.

Is this yet another reason to consider which ETFs you would be ultimately buying?

Don’t Pay For Something You Don’t Get

Came across this article on The Motley Fool. Usually I don't like many of their articles, but this one seems pretty applicable to Index Investing, in particular on STI ETF.

Article : Don’t Pay For Something You Don’t Get
Source : The Motley Fool (8th March 2013)
Author : Ser Jing Chong

Some investors choose not to put their money in actively managed mutual funds and unit trusts for various reasons, including a lack of time to monitor the market, or paying someone who is skilled or an expert in this field to manage their money for them. That’s what the management fees are for. The return of these mutual funds and unit trusts often depend upon the investment skills of the fund manager to achieve market-beating returns. But, there might be cases when the management fees are paid for not for any skill at all. 

In an out-of-print investment classic, Margin of Safety, Seth Klarman wrote that ‘since clients frequently replace the worst-performing managers (and since money managers live in fear of this), most managers try to avoid standing apart from the crowd.’ This means that money managers prefer to stick with the herd rather than risk their career by making bold investment choices. This gives rise to closet indexers – money managers who try to mimic a market index without publicly acknowledging it. It’s a case of you can’t go wrong if you follow the crowd in the money-management business, and is unfair to investors – they could be paying lower fees by choosing an index fund or ETF instead.

For those wondering what gives Seth Klarman the right to make such a statement, consider this: he is the founder and president of Baupost Group, a hedge fund company with compounded returns of close to 20% per year since 1992. Remarkably, Klarman achieved such returns while often holding up to 50% of his portfolio in cash. This is a highly idiosyncratic move that few money managers dare to make. 

Let’s take a look at one such example here in Singapore. Amundi Singapore Dividend Growth fund has achieved annualised net-of-fee returns of 4.8% (inclusive of dividends) for its investors from Dec 2009 to Dec 2012. DBS Group Holdings Ltd (SGX: D05), Singapore Telecommunications (SGX: Z74) and United Overseas Bank (SGX: U11), which are all components of the Straits Times Index (SGX: ^STI), make up the fund’s top three holdings as of 31 Dec 2012. In fact, the top 9 holdings in the fund’s portfolio, with a total weightage of 61.32%, are all components of the STI. 

The fund’s movement and the STI might be tracking each other due to the close parallels of their composition. This would make any substantial outperformance of the market for the fund’s investors hard to achieve due to management fees, which eats into the returns. This fact is borne out by the SPDR Straits Times Index Exchange Traded Fund (SGX: ES3) having higher annualised returns of 8.55% (inclusive of dividends) in roughly the same time frame. Investors in the SPDR STI ETF are essentially investing in the STI as the ETF is meant to track the movement of the index. 

The Foolish Bottom Line 

Investors often do not bother checking the portfolio of their funds. But, in cases where even a rough glance shows a very strong resemblance between a market index and a fund’s portfolio, it might be in the investor’s best interest to switch out of the actively managed, high-management-fee fund to a passively managed, low-fee index fund or ETF. After all, what use is there for a management fee if lower cost and better-return alternatives are readily available?

STI ETF Purchase [24-Dec-2012]

Bought via Standard Chartered Online Trading Account

Nikko AM Singapore STI ETF Order Price : $3.20
Order Quantity : 100 share(s)

Trade Consideration : $320.00 [$3.20 x 100]
Client Commission : $0.64 [$320.00 x 0.2%]
SG Clearing Fee : $0.13
Client GST : $0.05

Total Transaction Amount : $320.82

Standard Chartered Online Trading Account

Before you can invest, you'll need to have a trading account.

Currently, Standard Chartered is the only option that offers no minimum commission, which is great for investing small amount of money every month. Every other bank or brokerage is not acceptable due to the high expense incurred e.g. minimum $25.

Standard Chartered Brokerage Fee : 0.2%

For in-depth analysis of the advantages and disadvantages of Standard Chartered, Invest In Passive Income has two excellent posts here and here.

Example of a Trade on Nikko AM Singapore STI ETF (G3B)

Nikko AM Singapore STI ETF Order Price : $3.20
Order Quantity : 100 share(s)

Trade Consideration : $320.00 [$3.20 x 100]
Client Commission : $0.64 [$320.00 x 0.2%]
SG Clearing Fee : $0.13

Total Transaction Amount : $320.77

Passive Index Investing - What To Buy?

In order to perform passive index investing in Singapore, two of the vehicles you have access to are listed below. Both are Exchange-Traded Funds tracking the Straits Times Index (STI).

What is an Exchange-Traded Fund?

An exchange-traded fund (ETF) is an investment fund traded on stock exchanges, much like stocks. An ETF holds assets such as stocks, commodities, or bonds, and trades close to its net asset value over the course of the trading day. Most ETFs track an index, such as a stock index or bond index. ETFs may be attractive as investments because of their low costs, tax efficiency, and stock-like features. [read more from Wikipedia here]

While I'm at this, let me add on a third ETF that would be useful to you, and is also one that I'm intending to blog a bit on in future.

[1] SPDR Straits Times Index ETF | Price via Yahoo! Finance

Fund Information :
The SPDR® Straits Times Index ETF ("STI ETF"), Singapore's first locally created exchange traded fund which was formerly named streetTRACKS STI ETF, seeks to generate returns that closely correspond to the performance of the Straits Times Index ("Index"). The Fund is listed and traded like any share on Singapore Exchange Securities Trading Limited.

Lot Size : 1,000
A minimum purchase is going to cost $3,210 based on 24-Dec-2012 price, excluding brokerage fees etc.

[2] Nikko AM Singapore STI ETF | Price via Yahoo! Finance

Fund Information :
The Nikko AM Singapore STI ETF will initially invest in a portfolio of Straits Times Index (STI) stocks listed on the Singapore Exchange. It will mirror closely the performance of the STI. The STI is a market-weighted stock market index based on the performance of the Singapore stock market. It comprises of the most well-known and frequently traded shares on the Singapore Stock Exchange. The Fund's investment objective is to replicate as closely as possible, before expenses, the performance of the Straits Times Index or upon the Manager giving three (3) months' prior written notice to the Trustee and the Holders, such other index which tracks the performance of Singapore listed equity securities. The Fund will seek to achieve its investment objective by investing all, or substantially all, of its assets in Index Shares in substantially the same weightings as reflected in the Index.

Lot Size : 100
A minimum purchase is going to cost $321 based on 24-Dec-2012 price, excluding brokerage fees etc.

[3] ABF Singapore Bond ETF | Price via Yahoo! Finance 

Fund Information :
ABF Singapore Bond Index Fund (the "Fund") will initially invest in a portfolio of high quality, Singapore government and quasi government bonds. It will mirror closely the basket of bonds in the iBoxx ABF Singapore Bond Index. The target tracking error of the fund is set at not more than 0.4% per annum.

Lot Size : 1,000
A minimum purchase is going to cost $1,180 based on 24-Dec-2012 price, excluding brokerage fees etc.

What is Index Investing?

If you're here, I would assume you have a general idea of what Index Investing is all about. If not, here is a rather easy-to-understand article from The Motley Fool that you can finish reading in 60 seconds.

If you have more time to spare, watch this excellent video on passive index investing which would change the way you think about investing.