Thinking of investing in STI ETF? 3 things you need to know

Are you thinking of investing in STI ETF? Due to the recent crash, if you have just started putting money in March, you will have a 15%-20% jump. Before you dive into STI ETF, here are three things to consider.

3. Dividends yield

We can broadly categorise stocks into 2 types: growth stocks and dividend stocks. A dividend is a portion of earning that is returned to the shareholders. Since this portion of earning is distributed, it could not be used by the company to invest and grow their companies. Usually, the more mature companies will be the ones giving out dividends.

In general, I like to look at dividend stocks, or REITs (another high dividend yield financial instrument), as financial instruments with stable pricing. Growth stocks will be the one with higher fluctuations in the market, like Tesla, Apple, and Netflix. Due to the fluctuations, they are considered to have a higher risk.

Since its inception, STI ETF has been usually trading around the range of 2.50 to 3.60. STI ETF generally has a dividend yield of 3% - 5%. Over a 10-years growth.

Let's say if you plan to have $2500/month dividend cash flow, in addition to your other retirement fund, you will require $30,000/year. On a 4% dividend draw out, you will require a $750,000 invested.

2. STI ETF lags behind the international counterparts

In comparison with other international ETFs, STI ETF seems to perform at a subpar level. Even when the economy of Singapore is improving on a yearly basis, the STI ETF index does not seem to reflect too much of that in the pricing.

However, if we were to look at the ETF of bigger markets, the ETF provides a more sizeable return. In comparison, SPX, which tracks the 500 largest large companies listed on the stock exchange in the United States. SPX outperforming STI ETF is granted as it represents some of the biggest companies in the world. Still, I will have expected STI ETF, to have more of an upwards trend than a sideway movement, as Singapore is ranked 36 in the world in terms of GDP.

1. The main components of STI ETF are the banks

The main idea of buying an ETF is that it provides certain diversification without requiring the investor to hold individual stocks. For example, a single SPX ETF will give you exposure to 500 stocks at once.

The theory behind diversification through ETF is:

  • to reduce exposure to a single type of assets. Certain stocks are inversely correlated or have a weak correlation with each other. In a market downturn, different holdings will help to offset the risk.
  • to achieve diversification on one own effort might be complicated and expensive

They could be deemed as a better choice due to a lower cost, high liquidity and their relative performance compared to actively managed funds.

However, if we were to dig deeper, we could see that the sector allocation of STI ETF is 41.7% in financials and 22.3% in real estate. If we take a look at the chart of the 3 banks, we can see that each of them took a hit around 2018 and has not fully recovered to their previous high. In this aspect, STI ETF seems to provide a relative weak diversification, with the top 3 weightage in banks.

But I get it, Singapore is a financial hub with a relatively small population. If anything home-grown is to grow bigger, the chances are it will be the financial sectors. Telecommunications and consumer discretionary will hardly make any significant impact.

My portfolio

To date, I have a principal amount of 11,575.82. Current portfolio value is 10,839.43. That is a 6.07% loss. To date, I have also collected dividends of $455.75. Upon the next dividend round in January, I might still register a $100 - $200 loss, depending on the price of STI ETF, and assuming there won't be too drastic a move of the ETF price.

Personally, I also believe in Singapore role as a financial hub. That's why I have purchased DBS and SGX shares. Both SGX and DBS have a dividend yield of about 2%-3%. After the ex-dividend date of STI ETF, I will be liquidating all my holdings in STI ETF and better deploy my capital which can grow faster.

Looking at GIC portfolio as shown above, it makes sense to me reallocate my portfolio in manners that mirror the progress of the international market, rather than focusing in Singapore's market alone.

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