Compared to the West, Singaporean retail investors may thumb their noses at ETFs, thinking themselves smarter than the market. In a way, the wild heart of these punters is understandable. If an ETF that tracks the Straits Times Index (STI) is purported to perform well over time, why not buy the constituent stocks themselves?

In the endless debate over active versus passive investing styles, Asian investors love to get the best return from the stock market, says Mark Hui, head of global equity beta solutions (Asia ex-Japan) at State Street Global Advisors (SSGA). This means getting their hands dirty in a do-it-yourself approach to investing.

“If you tell them you can buy indices like that, they’ll think: ‘Why don’t I beat the index?’ That’s why I think ETFs in Asia have not grown as quickly as what we’ve seen in the past in Europe and the US,” he says in a recent interview with The Edge Singapore.

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Still, asymmetric information and lack of access to company management mean retail investors start out with their hands tied.

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“You are basically placing a lot of bets. Sometimes you may believe that you don’t need to worry about blue-chips for example, but if you look back at some of the Chinese names, which are blue-chips themselves, they’re huge in market cap but they can still turn around quite quickly,” Hui adds.

Tech companies, for example, are volatile and offer lots of capital growth, he says, but they hardly pay any dividends. “So, there needs to be a balance, obviously. You don’t want to put all your money in all these high-risk names. Of course, you can do it if you’re young, but we’re talking about the whole population, where a lot of them are looking to save up their assets for retirement.”

As an executive at SSGA, it is no surprise that Hui makes the case for ETFs. The asset manager of State Street Corporation recently marked the 20th anniversary of the SPDR STI ETF.

Launched on April 17, 2002, the SPDR fund was the first ETF known to track the STI, letting fund holders gain exposure to Singapore’s top 30 listed companies.

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Before entering Singapore, SSGA also played a hand in launching the first ETF in the US in 1993, Hong Kong in 1999 and Australia in 2001.

Assets under management (AUM) from the SPDR STI ETF crossed the $1 billion mark in June 2020. As at May 6, the AUM stands at $1.63 billion with a net asset value of $3.34.

“The good thing about an ETF is that it is transparent, so you know what the holdings are. You can tell by the continued growth of it, I think that’s where we’re helping investors,” claims Hui.

Over the past two decades, Hui says investors flock to ETFs after periods of great upheaval. He explains: “If you look back at history, going through all these credit crises that we’ve had in the past 20 years, you’ll see that these market cap indices are still loved by investors. Every time after a crisis, people are more willing to buy into these [market cap] ETFs for very simple reasons.”

Not only are market cap indices like the SPDR STI ETF cheap to enter, they are easy to understand, he adds. “Market cap is a market standard; every single index provider has the same definition of calculating market cap indices. People understand it and it’s easy to invest.”

This is why the SPDR STI ETF has held its own against both the test of time and new thematic ETFs, says Meaghan Victor, managing director, head of SPDR ETFs Asia Pacific distribution at SSGA.

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“I think we need to come back to the fundamentals,” says Victor. “When investors are actually looking at the overall opportunity of investing in an ETF, it’s about looking at the total cost of ownership and why they are actually investing in that ETF to begin with.”

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She continues: “At the end of the day, we’re talking about securities. If you’re looking at a long-term plan, maybe for your retirement, or even from a five-year perspective, investing in ETFs, like any equity, is about making sure that you’ve got time in the market, not timing the market.”

Novice retail investors who entered the financial markets during Covid-19 should look beyond flashy advertisements for new products and brokerages, says Victor. “Sometimes, the marketing can be fantastic around a new product coming to market, but they really need to take a step back and look at the overall umbrella that they will be investing in.”

She also cautions: “What are the other hidden costs? Who is the manager of the fund? What is their expertise and how long have they been doing that? The total cost of ownership is incredibly important.”

Since the SPDR STI ETF was launched in 2002, the fund has achieved returns of 230%. Annualised performance of the fund since inception, meanwhile, stands at 6.54%.

Despite recent events, there is a brighter future to look forward to. As Hui explains: “We’re coming out from the problem rather than going into it. On growth, if you look at the whole ETF market, it is still growing. We’re looking at a very decent double-digit growth every year. I expect our product will be along that line as well.”

“If there are any breakthroughs in the Russian-Ukrainian war, it will be another helpful factor that will push it along. So, I am very optimistic about the continued growth of the STI index. It’s very hard to give you a forecast on where it will go, but it’s certainly on the positive side.”

Apart from working closely with the Singapore Exchange, Hui notes that his team works closely with index provider FTSE Russell. He adds: “Now, why is that important? We want to continue to be the leading indicator for investors, so we work with FTSE to closely review the rules for the STI constituents. We want to make sure that meaningful stocks are getting into the index, to ensure the index continues to work as efficiently as it should.”

“The last thing you want is a certain stock that is important to people not being reflected in the index. I think that particular relationship will be very important for the product. We’ll continue to do that to ensure that this index represents the economy; we will make every effort for that to happen.”

Photos: Bloomberg, State Street Global Advisors

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