Updated: Sep 28
The Straits Times Index Exchange-Traded Fund (STI ETF) is often touted as a 'low-cost, low-risk' investment decision suitable for beginners. To some extent, this is true. It is low-cost and easy to buy into either the SPDR STI ETF (SGX: ES3) or the Nikko AM Singapore STI ETF (SGX: G3B).
Buying into the STI ETF can be a good investment to have for a couple of reasons.
STI companies are all blue-chip, meaning that they are well-known, well-established and well-secured.
The Singapore financial sector has performed decently historically.
There is no foreign currency risk.
It's good to have an investment in your own country.
However, the STI ETF is by no means a conservative investment. It may be easy and affordable to buy into, but it is also volatile and overly concentrated in one industry. As such, I am not of the opinion that the STI ETF is a good decision for beginners.
1. Volatile stock history
The STI has price value drops that can be hard to stomach, compared to typical conservative mutual funds or ETFs. From the moment you invest, you could lose 50% of your capital, which actually happened between 2007 and early 2008 after the stock market crashed, compared to an average of 22% for a conservative fund of that time. A beginner jumping into the STI ETF would probably be scarred off investing for life.
Up till now, the stock value has yet to climb back up to what it was pre-2008 crash.
2. 100% equity investment
No one should jump into a 100% equity investment right from the very start unless they can stomach the high volatility. A 100% equity investment is a high stakes investment strategy where you can make off big but you can also lose big. That's because the volatility of companies and their success across a year is way higher than the active measures they can take in order to manage their debt (bonds), which would naturally have lower drops during bad times. This is also why many financial bloggers have advocated the 110 rule as a guide [subtract age from 110 to find the percentage of equities you should be invested in to generate wealth].
Proponents of this strategy argue that if you are unwavering in spite of the high fluctuations, you will recoup your losses with profit in the long run. But what does this say about the short run? Remember, we're talking about beginners who have never experienced what it's like to leave their money somewhere that isn't at home or the bank. Will you be the one to answer to them when things go sour for months, even years on end?
If you're a beginner, a much more stable investing instrument for you would be fixed income instruments such as bond deals. (Drop me a message to find out more!)
3. Poor diversification
Some argue that you only need 15-20 companies in order to diversify a fund but the irony lines in the fact that 56.4% of the STI companies are financials.
This is a common phenomena called mis-diversification, where a fund looks diversified but its component companies still have a high correlation to each other and with said correlation, comes concentration. One dip typically causes the majority of the same stocks to go down together. The success and failure of your investments banks (haha) very much on the health of Singapore's financial banks. And if you're a working professional in this sector when shit hits the fan, you would essentially be hit by a double whammy.
The STI's concentration in financials may be good for sectoral investors who rely on the potential growth of the industry such as financials and telecoms, but they'd have to deal the high volatility. More than half of their eggs are in ne basket. If the stock value were to drop drastically, the impact would be jarring.
The number of funds in the index is also a factor. The S&P 500 has 500 different stocks, while the STI only has a paltry 30. StarHub recently dropped out of the STI and this affected the entire performance of the STI far more adversely than if the ETF had been 20 times its size. After the, the impact of one company in an index of 500 companies is much smaller than that of a company in an index of 30.
Beginners are generally unequipped to deal with this kind of impact from a reason as simple as diversification.
Should I still invest in the STI ETF?
For the many reasons above, I do not advocate the STI ETF for beginners but that does not mean it is a terrible investment - especially for people who are here for the long term.
It's just that personally, the STI ETF is not something I invest in anymore because my priorities lie elsewhere. My goal is to make as much money as possible and with proper financial planning, long-term, illiquid and riskier assets make much more money over time. None of these criteria correspond to the STI ETF.
I specialise in aggressive investing and emerging markets, and quite frankly, they beat the STI's performance 100% of the time by a humongous margin over time. For me, investments like the STI ETF are things to consider in the later portion of my life when I'm looking to maintain my portfolio rather than grow it. Investments are customisable for every unique individual, and regular investing breeds wealth.