How to start investing in ETFs

If you’ve only got a minute:

• ETFs are a type of pooled investment fund that seeks to track the performance of a market index like the S&P 500 or Straits Times Index
• They are suitable investments for those who aim for stock diversification with relatively little cash outlay
• Retail investors can invest in ETFs by going through a brokerage, a regular savings plan and robo-advisors

Regardless of whether you’ve just embarked on your investment journey or an experienced investor, you’ve probably heard of the phrase “Don’t put all your eggs in one basket”. This proverb tells us that in life, we should not concentrate all our efforts or resources into one area. In other words, diversify.

When it comes to investing, this generally takes the form of holding a number of different stocks or bonds. By diversifying, investors are able to manage investment risk without necessarily holding back potential investment returns.

That said, this often requires stock picking, which can be a time-consuming pursuit, especially for new investors who are just learning the ropes.

Thankfully, there are a number of options for retail investors who want stock diversification from relatively small outlays. This includes exchange-traded funds (ETFs).

Read more: Diversify to help manage investment risks

What are ETFs?

ETFs are a type of pooled investment fund that trades on a stock exchange. It seeks to track the performance of a specific market index like the US’ S&P 500 index or Singapore’s Straits Times Index (STI).

Launched in 1993, the first US-listed ETF was the SPDR S&P 500 ETF. By investing in this ETF, you are essentially investing in a basket of the top 500 companies listed on the New York Stock Exchange or NASDAQ. Some of the companies held through this ETF include household names like Apple, Microsoft, Amazon and Tesla.

In Singapore, the Nikko AM STI ETF and SPDR Straits Times Index ETF are two ETFs that track the performance of the STI, an index of the city-state’s top 30 companies by market capitalisation. The STI, which serves as a benchmark of the Singapore stock market, includes well-known blue-chip stocks like the three local banks, Singtel, Keppel Corporation and CapitaLand Investment Management.

The benefit of this is that investors can capture the broad-based performance of a particular market without buying all the stocks that make up the index. Because an ETF essentially seeks to copy a particular index, investor returns should be close to that for the chosen market index it follows.

Another advantage is the access to the performance of a larger portfolio of stocks, bonds, commodities and even Gold. This reduces single stock/single bond concentration risk, which in turns gives you a level of diversification.

An ETF can also mitigate the level of volatility (to a certain extent) if some stocks within an ETF fall.

Things to note when investing in ETFs

Now that we’ve covered some of the basic features of an ETF. There are some other points that you should take note to understand ETFs better.

They are not unit trusts (UTs)

On the surface, they might appear similar to another commonly used pooled investment instrument, UTs. The main distinction between ETFs and UTs is that the former can be purchased or sold on a stock exchange like individual equities.

When ETFs were first launched, they mostly tracked a particular index, sector, commodity, or other asset, passively. This contrasts with UTs, which are traditionally actively managed by fund managers who make decisions about how to allocate assets in the fund.

That said, the line is now blurring. There is an increasing number of passive index UTs, alongside a growing range of actively-managed ETFs available to investors.

There are tracking errors

While ETFs seek to track the performance of an underlying market index, they do not do so perfectly. The deviation of performance between the two is called a “tracking error”.

To closely replicate the performances of underlying indices, ETFs have to constantly adjust the number of shares held in specific stocks as stock prices fluctuate. Time lags between market price movements and the adjustments in the ETF’s stock holdings can cause differences between the ETF’s performance vis-à-vis the benchmark index’s performance.

Usually lower cost than UTs

Generally speaking, ETFs tend to have lower costs than UTs. ETF management fees are usually lower because they are traditionally passively managed and do not employ fund managers for stock selection. They just buy the stocks to replicate the underlying index.

Read more: Costs of investing in ETFs

Investing in ETFs in Singapore

There is a variety of ETFs traded on the Singapore Stock Exchange (SGX) offering access to diverse markets, from stocks to bonds to commodities. The range of geographies covered is very extensive, including Singapore, China, Japan, Europe and the United States.

As of 31 Dec 2021, there are 35 ETFs listed on the SGX, a 15% increase over the previous year.

On 17 Jan 2022, the board lot size of all SGX-listed ETFs was reduced to 1 unit, from 5 to 100 units, previously. SGX has said this change is supported in part by the significant growth in dollar cost averaging (DCA). This not only gives more flexibility for portfolio management but also makes it more affordable for first-time investors, who might have less funds on hand to construct a diversified investment portfolio using only ETFs.

With the reduced lot size, an investor can now invest in the SGX-listed the SPDR S&P 500 US$ ETF for US$455.27 (based on the 1 Apr 2022 closing price) as opposed to US$4,552.70 based on a board lot size of 10 units. This reduces the minimum trade size per board lot by as much as 90%.

How to invest in ETFs

There are three ways retail investors can invest in ETFs. You can invest through:

1. Brokerages like DBS Vickers
2. Regular savings plans (RSPs) like DBS Invest-Saver
3. Robo-advisors like DBS digiPortfolio

Brokerages

For investments via trading platforms, you can invest in lump sums, whenever you wish. Through DBS Vickers, investors can get access to ETFs listed in 7 different markets.

Your CPFIS funds can be used for six SGX-traded ETFs (SPDR Gold Shares, SPDR Straits Times Index ETF, Nikko AM Singapore STI ETF, ABF Singapore Bond Index Fund, Nikko AM SGD Investment Grade Corporate Bond ETF and NikkoAM-Straits Trading Asia ex Japan REIT ETF).

You can also invest in all SGX-traded ETFs with your Supplementary Retirement Scheme savings.

RSPs

If you’re just getting into the habit of setting aside funds to invest, you can consider dollar-cost averaging (DCA) through a RSP. When investing through DCA, you are committing to making monthly regular investments of a pre-determined amount in the same product.

DBS Invest-Saver is a RSP that allows you to invest in ETFs through DCA from S$100 monthly. An advantage of DCA is that by making regular but small investments, you are averaging down the cost of the shares, ETFs or unit trusts. This means buying more units when prices are low and fewer when prices are high. It works on the idea of averaging out the prices paid over time and relying on the idea that good stocks and bonds generally build value over time.

Under the RSP, the four SGX-traded ETFs offered including Nikko AM Singapore STI ETF, Nikko AM SGD Investment Grade Corporate Bond ETF, ABF Singapore Bond Index Fund and the Nikko AM-StraitsTrading Asia ex Japan REIT ETF.

Investors in the ABF Singapore Bond Index ETF are putting money into a range of bonds, mostly issued by the Singapore Government and quasi-Government bodies.

Read more: Is DCA or lump-sum investing better for you?
Find out more about: DBS Invest-Saver

Robo-advisors

These are digital platforms that provide either fully automated or hybrid algorithm-driven investment services. Minimum investment sums for robo-advisors are relatively low. With DBS digiPortfolio, first-time investors are able to build diversified portfolios, which are composed with a selection of ETFs, with a minimum lump-sum investment of $1,000.

All you have to do is fill in a short questionnaire covering their age, investment horizon, risk tolerance and investible savings.

Read more: digiPortfolio: A robo-advisor for all
Find out more about: DBS digiPortfolio on digibank

Ready to start?

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Sources:
SGX, “ETF Trading Enchancements Commence 17 Jan," (2021, Dec 22). Retrieved 3 Apr 2022.

Disclaimers and Important Notice
This article is meant for information only and should not be relied upon as financial advice. Before making any decision to buy, sell or hold any investment or insurance product, you should seek advice from a financial adviser regarding its suitability.

All investments come with risks and you can lose money on your investment. Invest only if you understand and can monitor your investment. Diversify your investments and avoid investing a large portion of your money in a single product issuer.

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