Holding an exchange-traded fund (ETF) as opposed to individual stocks has its merits, including diversification and accessibility to various assets and/or market segments that are difficult to reach.
Compared to unit trusts, ETFs generally charge lower fees, thus helping you to reduce your investment costs while also possessing the added benefit of transparency and liquidity.
Owing to these advantages, Singapore Exchange (SGX: S68), or SGX, has seen an increase in the number of ETFs listed over time, from 31 in 2020 to over 40 as of June 2023.
Today, we introduce the newest addition to the growing list, CSOP iEdge Southeast Asia+ TECH Index ETF (SGX: SQU).
Investment objective and sectors
This ETF aims to replicate the performance of the iEdge Southeast ASIA+ TECH Index, a basket comprising the 30 largest technology companies in Southeast Asia (SEA) and Emerging (EM) Asia markets.
Even though returns were negative in the past year, the index achieved positive returns over longer horizons of three, five, and 10 years.
We now take a deeper dive into the constituents making up the ETF.
There are a total of 30 stocks, with the top 10 constituting just over three quarters of overall weightage.
There are several prominent names among them such as super-app Grab Holdings (NASDAQ: GRAB) and blue-chip stocks like Jardine Cycle & Carriage (SGX: C07).
Also, despite the naming of the ETF, it contains other sectors apart from technology.
Hence, it provides investors with exposure to a multitude of sectors.
These include the consumer discretionary, communication services and industrials sectors.
Together with the technology sector, these four sectors have been marching upwards strongly in 2023.
To illustrate, the respective MSCI Index for each of the four sectors has outstripped the MSCI World Index on a year-to-date basis, with Industrials being the only exception.
Even then, the MSCI World Industrials Index still generated positive gains.
Fast-growing markets
Moving onto geographic exposure, the selection of countries where these companies are domiciled in is targeted at riding the innovation and growth bandwagon.
SEA and EM Asia have been and will continue to be well-poised to deliver strong GDP growth in the coming five years.
Rising income levels have been a strong indicator for publicly listed technology companies to do well.
This was witnessed in multiple APAC countries such as Japan, Korea, and more recently China.
Following the trajectories of these three countries, the SEA market has exhibited signs that will favour the stocks owned by the ETF.
Apart from growing affluence, digitisation is increasingly prominent in the region, characterised by a swelling internet user base due to younger digital natives.
This is exceptionally crucial for the ETF to do well because a growing digital economy encapsulates not just technology, but also other areas too.
For instance, travel falls within the consumer discretionary sector, on-demand music and videos are captured in the communications sector, and transport has industrial roots as well.
All these represent tailwinds that provide buoyancy to lift the overall performance of the ETF.
Newer growth ETF entails multiple risks
Taking a balanced view, investors may want to consider several risk items specific to this ETF before deciding if it is suitable for them.
The first pertains to emerging market risk due to potentially lower political or economic stability in certain countries.
Another characteristic of emerging markets is a developing legal system, which is especially relevant to the sectors held.
This is because technology-related industries are more dependent on attaining regulatory approvals and also subjected to more onerous governmental oversight due to the storage of sensitive consumer data.
There is also a country (or emerging market) risk premium.
This term refers to the excess returns that investors demand in exchange for taking on higher risks.
Thus, investors may require assurance that this ETF can provide higher returns before deciding to invest in it.
An important consideration when investing in ETFs is their expense ratio, which is a fee charged to investors by the fund manager.
A lower expense ratio is preferred as fees will erode investors’ returns.
Unfortunately, there is no expense ratio available yet due to the recency of this ETF’s launch.
Besides the expense ratio, the distribution policy of an ETF is also significant for all investors, and in particular to dividend-seeking investors looking for a steady income stream to cope with rising inflation.
The manager of the ETF, CSOP Asset Management, has the sole discretion to determine the rate and frequency of distributions.
Taken together with the lack of a distribution history to serve as reference, this represents an extra layer of uncertainty for investors.
Get Smart: Align your risk appetite with investment strategy
The bottom line is that investors ought to first understand their risk profile.
This ETF seems to cater more to investors with a growth-oriented mindset as opposed to those prioritising predictable, regular payouts in the form of dividends.
Based on its risk profile, the ETF provides investors with greater upside for capital appreciation in exchange for higher volatility.
There is no question that the absolute or relative performance of an investment matters.
However, what is arguably equally important is the alignment of an ETF’s strategy with the individual’s investment objectives.
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Disclosure: Tan Ke Xuan does not own shares in any of the companies mentioned.
