Exploring Best ETFs in Singapore: Guide to Index ETFs Investing [2024 Guide]

Exchange-Traded Funds (ETFs) are investment vehicles that combine the characteristics of mutual funds and individual stocks. They consist of baskets of securities that trade on stock exchanges, offering investors diversification, flexibility, and ease of trading. ETFs allow you to invest in a wide range of asset classes, including stocks, bonds, commodities, and more, all within a single fund.

The popularity and growth of ETFs have been remarkable. Globally, there are over 8,800 ETFs with more than $10 trillion in managed assets. This impressive growth reflects the increasing preference among investors for diversified, cost-effective investment options. In Singapore, the trend is no different. The Singapore Exchange (SGX) lists over 70 ETFs, providing local investors with ample opportunities to diversify their portfolios and access global markets efficiently.

In this guide, we will explore the best ETFs available in Singapore, helping you make informed decisions to enhance your investment strategy in 2024.

What exactly is an ETF

Exchange-Traded Funds (ETFs) are investment funds that hold a collection of assets like stocks, bonds, or commodities. They trade on stock exchanges like individual stocks, providing diversified exposure to a range of securities within a single fund. Here’s how ETF function:

1. Creation and Redemption:

• Creation: Authorized Participants (APs) create ETFs by exchanging a basket of the underlying assets for ETF shares.
• Redemption: APs can redeem ETF shares for the underlying assets, ensuring the ETF’s price stays aligned with its net asset value.

2. Operation:

• Trading: ETF shares are bought and sold on stock exchanges throughout the trading day at market prices.
• Diversification: ETFs offer built-in diversification by holding various securities within one fund.
• Low Costs: ETFs often have lower expense ratios compared to mutual funds because they are usually passively managed.

3. Role of Market Makers:

• Market makers ensure liquidity and smooth trading by providing bid and ask prices, facilitating the continuous buying and selling of ETF shares.

In essence, ETFs combine the diversification of mutual funds with the trading flexibility of stocks, making them a popular investment choice.

How many types of ETFs are there?

ETFs come in various forms, each catering to different investment strategies and asset classes, allowing investors to tailor their portfolios to specific goals and risk tolerances. Here are some common types of ETFs:

Why invest in ETFs

ETFs are a popular investment choice for a variety of reasons, making them a valuable addition to any portfolio. Here’s why:

• Low Barrier of Entry for New Investors: ETFs are excellent for beginners due to their simplicity, allowing investors to access broad market segments without selecting individual stocks or having deep financial knowledge. Many ETFs also offer automatic rebalancing, reducing the need for constant monitoring.

• Low-Cost Investment: ETFs generally have lower expense ratios because they are passively managed, avoiding the higher costs associated with active management. For example, the SPDR S&P 500 ETF has an expense ratio as low as 0.0945%, making it a cost-effective investment option.

• Instant Diversification: Investing in a single ETF provides exposure to a variety of assets, sectors, and regions, which helps spread risk. For instance, the iShares MSCI All Country World Index covers thousands of global stocks across multiple sectors, offering extensive diversification.

• Passive Investment Strategy: ETFs facilitate a hands-off investment approach, allowing portfolios to align with market returns rather than trying to outperform them. This passive management is appealing to investors who prefer long-term, steady growth without active management.

• Trading Flexibility: Unlike mutual funds, which trade only once per day after the market closes, ETFs can be traded throughout the trading day, providing flexibility similar to that of individual stocks.

But are there any downsides to investing in ETFs?

While ETFs offer numerous advantages, they are not without their downsides. Here’s a closer look at some potential drawbacks:

• Inherent Underperformance of the Index: ETFs aim to replicate the performance of an index, but after accounting for fees and expenses, they typically lag slightly behind the actual index returns. This underperformance is generally minor but is a fundamental aspect of ETF investing.

• Lack of Control Over Individual Holdings: Investors in ETFs cannot choose individual components of the fund. If an index drops a company or sector that an investor prefers or includes one they wish to avoid, they have no recourse but to accept these changes. This can be frustrating for those who wish to have more direct control over their investment choices​.

• Potential Complacency with Diversification: While ETFs offer broad diversification, this can sometimes give a false sense of security regarding the level of risk involved. Market downturns can still adversely affect broadly diversified ETFs. Significant market events, like the rapid decline during early 2020, demonstrate that ETFs are still subject to volatility and market risk​.

• Limited Potential for Outperformance: By design, ETFs do not aim to beat the market; they aim to match it. This means the potential for significant outperformance, as might be seen with individual stocks or actively managed funds, is not possible. Investors looking for higher returns through more aggressive strategies might find ETFs too conservative​.

Major ETFs in Singapore

Singapore offers a variety of ETFs that cater to different investment strategies and asset classes. Here are some of the major ETFs available on the Singapore Exchange (SGX), along with what they track and their recent performance.

* returns as of 30 Apr 2024

How to Invest in ETFs in Singapore

Investing in ETFs in Singapore can be a straightforward process when you understand the various methods available. Here are the primary ways to invest in ETFs:

Brokerage Accounts

Setting up a brokerage account is the first step to invest in ETFs. Here's a guide on how to do it:

1. Open a CDP Account: To hold your Singapore Exchange (SGX) listed stocks, you'll need a Central Depository (CDP) account. You must be at least 18 years old and have a bank account with one of the local banks (e.g., DBS, OCBC, UOB). You can apply online via the SGX website using your SingPass for a streamlined process​.
2. Choose a Brokerage: Select a brokerage firm that suits your needs. Some of the major brokerages in Singapore include DBS Vickers, OCBC Securities, and Phillip Securities. These firms offer competitive commission rates and various tools to assist you in your investment journey​.
3. Open a Brokerage Account: You can open an account online through the brokerage's website or visit their office for assistance. Ensure you have your identification documents and proof of your bank account ready.

Regular Savings Plans (RSPs)

Regular Savings Plans (RSPs) allow for periodic, automated investments into selected ETFs. This is an excellent way for investors to build their portfolio over time without needing to time the market.

One example is POSB Invest-Saver where this plan allows you to invest in ETFs like the Nikko AM Singapore STI ETF or the ABF Singapore Bond Index Fund with a minimum monthly contribution. The process is automated, making it easy for investors to steadily build their investments​.

Robo-Advisors

Robo-advisors are digital platforms that provide automated, algorithm-driven financial planning services with little to no human supervision. These platforms typically use ETFs to build diversified portfolios based on your risk profile.

StashAway is a popular robo-advisory platform in Singapore. It offers flexible portfolios that use ETFs to achieve diversification. Based on your risk tolerance and investment goals, StashAway constructs a portfolio that is rebalanced automatically to maintain the desired asset allocation.

Each of these methods offers different advantages, whether it’s the flexibility of a brokerage account, the convenience of automated savings plans, or the sophisticated portfolio management of robo-advisors. Choose the one that best fits your investment strategy and financial goals. For more detailed information, visit the SGX ETF screener and other related resources.

Strategies for ETF Investing

Investing in ETFs requires strategic planning to align with your financial goals and risk tolerance. Here are some key strategies to consider:

Long-Term vs. Short-Term Investment

For long-term investing, the focus is on holding ETFs for several years, allowing you to benefit from compound growth and ride out market volatility. This approach is ideal for goals like retirement or college savings. Choosing ETFs with strong historical performance, low expense ratios, and diversified holdings is crucial. Broad market index ETFs, such as the SPDR S&P 500 ETF or the Vanguard Total World Stock ETF, are excellent choices for long-term growth due to their extensive diversification and lower costs​.

In contrast, short-term investing involves holding ETFs for a few months to a couple of years. This strategy might be suitable for objectives like saving for a down payment or taking advantage of market trends. Sector-specific or thematic ETFs, such as those focusing on technology or healthcare, can capture short-term growth opportunities. These ETFs may perform well during specific economic cycles or market conditions, providing potential short-term gains.

Risk Management

Effective risk management starts with assessing your risk tolerance, which depends on factors like age, income, investment experience, and financial goals. 

To balance risk in your portfolio, use a mix of equity and bond ETFs. Equity ETFs offer higher growth potential but come with higher volatility, while bond ETFs provide stability and income generation. For instance, pairing a broad market equity ETF with a high-quality bond ETF can help smooth out returns and reduce overall portfolio risk​.

Rebalancing

Rebalancing is an essential strategy to maintain your desired asset allocation. Market movements can cause your portfolio to drift from its intended allocation, making periodic adjustments necessary. Set a rebalancing schedule, such as quarterly or annually, to review your portfolio. During rebalancing, sell portions of ETFs that have grown beyond your target allocation and buy more of those that have underperformed to restore the original balance​​. For example, if your target allocation is 60% stocks and 40% bonds, but due to a stock market rally, your portfolio shifts to 70% stocks and 30% bonds, you would sell some stock ETFs and purchase bond ETFs to restore the original allocation​​.

Wrapping Up Your ETF Investment Journey

ETFs offer a versatile and efficient way to diversify your investment portfolio, catering to both new and experienced investors. Their ability to provide broad market exposure with low costs and built-in diversification makes them a valuable tool for achieving financial goals. Whether you aim for long-term growth or short-term gains, ETFs can be tailored to suit your investment strategy, offering flexibility and ease of management.

As you embark on your ETF investment journey, remember to assess your risk tolerance, choose the right mix of assets, and regularly rebalance your portfolio to stay aligned with your goals. The Singapore market provides a variety of ETFs, each with unique advantages and potential. Invest wisely, stay informed, and leverage the resources and platforms available to make the most of your investments. Happy investing!