ETFs in Singapore are an exciting and relatively new investment vehicle for the less experienced investor to get into. Often marketed as a way to diversify one’s portfolio, ETFs allow small investors access to indices such as the Straits Times Index (SGX: ^STI) without needing to deal with high brokerage fees or minimum investment amounts.
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ETFs for passive investment in a cost-efficient manner
The fees attached to ETFs under Singapore’s four leading fund houses are the lowest among all financial products available in this market. It includes annuity plans and insurance policies that do not beat inflation over long periods.
Access to markets across different geographies
ETFs track indexes that represent the equity markets of multiple countries simultaneously, allowing investors to gain exposure to foreign economies without having to invest overseas directly via forex trades or buy into single stocks on their own. Furthermore, diversification is achieved at meagre costs.
Ease of use with high turnover ratios
With just $1000 (SGD) needed to purchase an ETF in Singapore, the barrier to entry for investing is extremely low. The average turnover ratio of these funds in Singapore is very high at 1,326% per annum. It means that ETFs are relatively liquid and can be used to meet short-term needs due to their quick turnaround times.
Ability to trade throughout market hours
ETFs are traded within secondary markets like NYSE Arca or London Stock Exchange throughout the day, compared with traditional mutual funds, which only allow investors to buy into them through pre-defined opening hours on weekdays (excluding public holidays). They also open up stocks added during aftermarket hours, which conventional index funds cannot accommodate.
Tax efficient structure
One of the most attractive features of exchange-traded funds is their tax efficiency. Given that ETFs are index-tracking funds, investors can avoid long-term capital gains taxes in Singapore on dividends paid out by foreign companies. It only applies to securities held in taxable accounts.
Diversification possible for beginner investors
With low initial capital requirements and instant diversification available through ETFs listed on SGX, these products provide an ideal entry point for novice investors who do not wish to actively manage their portfolio or spend time tracking down undervalued stocks in small-cap indexes. These funds also allow users to trade via brokerage platforms like Xtrade, Saxo Capital Markets and Citibank Online Stockbroking.
Easy access to foreign currencies through ETFs
To gain exposure to different types of forex pairs, investors can invest in international ETFs which use their underlying constituents’ weightings (based on the country’s market capitalization) to determine the fund’s allocation across various global stock exchanges. These funds allow investors to avoid the hassles of opening up accounts with different brokers and deal with multiple log-in credentials for each trading platform.
Additional benefits
Exchange-traded products like SPDR Dow Jones Industrial Average Fund (ETF) offer daily liquidity and allow intraday buying and selling of shares within secondary markets, allowing for automatic rebalancing of equity positions without incurring transaction costs. Risk control features like stop-loss orders are also available at a meagre cost to users of these funds.
High liquidity on SGX secondary market
The average daily trading volume of ETFs listed on the Singapore Exchange is $32 million, on top of their high turnover ratios, ranging from 1,000% to over 4,000%. It facilitates ease of trades and ensures that transactions can be completed in a timely fashion while minimizing bid/ask spreads or price gaps between entry and exit points for investors holding positions at the end of every day.
Access to overseas markets through ETFs
ETFs offer diversification across different equity markets coupled with meagre fees (index funds) or tax benefits (currency funds) to users looking for exposure to foreign markets like the US and Japan. As such, ETFs provide a quick and convenient way to invest in overseas market segments that may not be available with additional equity or currency deposits required.