How to select ETFs in Singapore?
One of the most commonly asked questions is how to select ETFs in Singapore. There are hundreds of ETFs out there, and all with different features. It can be unclear for people who are new to investing for the first time through an ETF. Here’s a guide to help you pick your investments. Check out a Saxo trader today to assist you with EFTs in Singapore.
ETF Terminology to know?
If you are not knowledgeable about investment terms, here are some definitions before we start:
1) Capital gains tax: A capital gain, or capital loss, is money made or lost on an investment portfolio throughout its holding period. Buy low, sell high? That’s what this means.
2) Dividend: When a company makes a profit, it has two choices – it could plough the money back into the company to expand and improve their business or payout that extra money as a dividend. Dividends are payments made by companies to their shareholders in cash or additional shares in the company.
3) MER: It is an acronym for management expense ratio, which indicates how much will be deducted from your returns when investing in particular ETFs. For example, if you were investing $1000 in an ETF with 0.5% MER, this means $5 would be deducted from your return every year for admin costs. The higher the MER, the more expensive it gets and vice versa
Let’s start with how you select ETFs in Singapore. If you are new to investing, do not go for individual stocks. It’s because of the higher risk, and you would not understand what you are investing in at all. Go for ETFs instead because it’s low-cost and diversified.
Types of ETFs available in Singapore?
These days, two main types of ETFs are available in Singapore – Index Funds and Actively Managed Funds.
It is an investment fund that invests directly into securities or other assets based on a predefined index, hence its name “index fund”. An example would be the Straits Times Index (STI)ETF which tracks the STI performance. The index funds will try their best to follow the performance of their target indexes as closely as possible.
Actively Managed Fund:
As the name implies, their managers manage them actively, who will try to outperform specific benchmarks. They charge higher fees because of their active management. An example would be Joel Greenblatt’s magic formula stocks, popular in the USA. The problem is that they can deviate wildly from time to time, and you need to do your homework well before investing in them.
Factors to consider?
When it comes to how do you select ETFs in Singapore, there are many factors to consider:
1) Number of Holdings:
This means how diversified your investment is. The more companies/shares/assets the fund holds, the less risky it gets because you spread your risk across different assets no matter what happens to the market.
The management expense ratio (MER) is one of the leading indicators to help you decide how expensive your investment will get. Usually, the lower the MER, the better it gets because every dollar deducted from your returns is a dollar less that can grow in your investments. Look out for funds with low MER but still perform well after fees are taken into account!
3) Expense Ratio:
This is closely tied to MER, and it represents what percentage of assets it costs to operate an ETF. It’s usually calculated annually.
You should go for popular ETFs, which means they tend to have higher trading volumes than others. They are easier to buy and sell and hence less risky for you.
5) Tracking Error:
This is closely tied to how much the fund deviates from its benchmark index. A high tracking error percentage means that your returns will differ from the performance of your benchmark index, which defeats the purpose. Tracking error will only matter if your investment time horizon is 1 year; otherwise, you can ignore it for now.