🐌 Sluggish performance
The first investment I made back in 2015 when I was in national service was in a fund that tracked the Straits Times Index (STI).
I had read about how great long-term investing in index funds was, and investing in foreign markets felt too risky to me back then.
For six years, I added to my holdings whenever I had cash from my NS allowance or from part-time jobs during my university days. By the time I sold in 2021, after markets recovered from the Covid-19 crash, I made a profit of S$750 from a total of S$11,000 invested.
The returns were far from what I had expected. If I had invested my money in an S&P 500 index fund instead, which tracks the 500 largest companies in the US, I’d have made much more even. But more on the US stock market later.
There’s been much talk about the sluggish performance of the Singapore stock market in recent months (see: here, here and here), so much so that the Monetary Authority of Singapore has set up a review group to recommend actions to revive it.
For many Singaporeans, the STI is likely the first market index we’d have heard of. Friends and family members may have recommended that we invest in it too.
What I’ve learnt is that the STI is very different from what new investors think of when it comes to index funds 🤔.
🏧 It’s mostly banks
For one, there are only 30 companies on the STI. Compare that with the S&P 500 or the more than 2,500 companies on the Nasdaq composite index.
So if you’re investing in an index fund to seek diversification, the STI won’t give you as broad of a base.
And if you look deeper, the three local banks – DBS, OCBC and UOB – make up around half of the index. (That’s because the STI holds a proportion of each of these 30 companies based on their market capitalisation. So the bigger the company, the bigger its weightage in the index.)
It’s why investors argue that the STI is not an accurate representation of the Singapore economy. Despite the huge holding in the index, the finance and insurance sectors make up only about 14 per cent of the economy.
📈 Role of the STI
If you had invested in the SPDR Straits Times Index ETF, a popular exchange-traded fund, over the past decade (and reinvested all the dividends), you’d have made 3.81 per cent in returns per year on average.
By comparison, the SPDR S&P 500 ETF would have netted you 12.52 per cent over the same period after accounting for taxes on dividends 💫.
Especially before Covid, the performance of the STI had been “stagnant” for a very long time, says Katherine Chua, an investment advisor from investment platform FSMOne.com.
“So actually, you do not need to limit your investment choice to just an ETF in the Singapore equity market because, essentially, about half your portfolio is in financials,” she tells thrive.
Past performance does not indicate future performance, of course. However, banking stocks – being mature businesses 🧓 – typically don’t experience the growth that tech stocks that feature heavily on global indices do.
“If you do want to have some exposure in tech, semiconductors or consumer discretionary names that are of a global international scale, you definitely need to venture out of the Singapore equity markets,” Chua says. “Usually, you’ll find most of these companies listed in the US stock exchanges.”
One reason some investors prefer not to invest overseas is because of currency risk 💱. When you invest in a US stock, for example, and the US dollar weakens against the Singdollar, you risk losing money from the currency exchange.
But there’s a bigger risk at play here, says Terence Wong, the founder and CEO of fund management firm Azure Capital.
“There’s an opportunity cost to not investing in the US. If the (US market) goes up by 10 per cent versus 2 per cent for the STI, then you can afford the currency risk.”
Still, Wong believes that young investors can benefit from holding a percentage of the STI in their portfolios.
Investing in the STI is a different proposition altogether from investing in a growth-oriented index like the S&P 500, he says.
Many of the companies in the STI are yield-driven and pay relatively high dividends.
“There was some life this year, but it has been very, very slow moving, also because it is a function of the underlying assets,” says Wong.
“Going back to the roots, it’s a yielding asset – it is boring, but relatively safe.”
TL;DR
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Often the first index fund introduced to new investors in Singapore, the STI has lagged global indices in performance
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The STI comprises just 30 stocks, far less than the hundreds or thousands in other indices
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Three banks, alone, make up around half of the STI
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Unlike indices like the S&P 500, the attractiveness of investing in the STI often isn’t capital appreciation, but dividends