Blue chips, which often refer to stocks that make up the Straits Times Index (SGX:^STI), are a favourite among Singapore investors.
The SPDR STI ETF (SGX: ES3), an exchange traded fund which mimics the movement of the STI, represents a quick way to participate in some of the biggest companies in Singapore without committing too much capital.
The other benefits of an ETF include lower fees and instant diversification.
In simple terms, if you buy the SPDR STI ETF, you will own a small piece of all 30 listed companies inside, which are worth S$291 billion in net market capitalisation as at the end of August 2021.
However, before you consider investing in an index-tracking fund, there are a few key things you need to know about the index (figures are as of 31 August 2021, unless otherwise stated):
- The largest company in the STI is DBS Group Holdings Ltd (SGX: D05) with a net market cap of S$53.8 billion. The index’s smallest component is Dairy Farm International Holdings (SGX: D01). The average size of an STI stock is S$9.7 billion by the same measure.
- The SPDR STI ETF’s annualised performance (including dividends) between 11 April 2002 (the fund’s inception) and the end of August 2021, a period of over 19 years, is 6.36% per annum.
- In comparison, the STI’s annualised performance over the same timeframe above is 6.42%. The 0.06% difference between the ETF and the STI’s performance comes from the fund’s tracking error.
- Returns can be impacted by fund expenses. For investors, the smaller the expense ratio, the better the returns. As of June 2021, the ETF’s expense ratio was 0.3%, a relatively low ratio in Singapore.
- The SPDR STI ETF has a 3.45% dividend yield. Given that the long-term returns are 6.36%, dividends played a sizable role in the STI’s performance.
- Singapore’s big three banks, DBS, United Overseas Bank Ltd (SGX: U11), or UOB, and Oversea-Chinese Banking Corp. Limited (SGX: O39), or OCBC, hold the highest weightages in the STI index, accounting for over 43% in total.
- Given the outsized weightage of banks, it should be no surprise that financials is also the sector which holds the most sway in the index, contributing close to 46% overall.
- The second most important sector is real estate with 11 companies, accounting for a 22% weightage on the index. CapitaLand Group, Ascendas Real Estate Investment Trust (SGX: A17U) and CapitaLand Integrated Commercial Trust (SGX: C38U) are the largest representatives for the sector. The former has since restructured to become CapitaLand Investment (SGX: 9CI).
- Industrials account for almost 10% of the STI. The largest contributor would be Jardine Matheson Holdings Limited (SGX: J36), which has a 5.2% index weightage.
- The smallest sector would be utilities which accounts for 0.6% of the STI. Sembcorp Industries Limited (SGX: U96) is the only representative from the sector.
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While the STI has delivered decent returns over the past 19 years, its recent performance has been less impressive.
Over the last 10 years, the STI has only managed a 3.7% annualised return, which barely beats inflation and falls below the 4% per annum offered by the CPF Special Account.
Investors who would like to improve their returns can consider supplementing their investments with a handful of individual stocks or by buying other ETFs that have historically done better.
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Disclaimer: Chui Hui Leong owns shares of DBS Group, UOB, OCBC, Ascendas REIT and CapitaLand Integrated Commercial Trust.