08 January 2015

Exchange Traded Funds - Navigating Through the Maze

The number of Exchange Traded Funds (ETF) that have been introduced on the SGX has been growing at an explosive pace.

ETFs that are index-tracking are touted as a better alternative to investing via Unit Trust given their lower fees. There is also the belief that being average (i.e. tracking the index) is better than being clever - i.e. beat the index. After all, if half the traders beat the index, the other half must surely have lost to the index. Reminds me of the phrase Hokkien phrase, "ai kiang, mai keh kiang" ("be smart, don't be overly smart!").

There are good introductory articles, such as those published by MoneySense to explain ETFs (see Introduction to ETF). SGX also publishes the list of ETFs and their current data at SGX ETF List. And there are more detailed information that were previously published at SGX as well - Detailed Information on ETF, dated Sep 2014. The list of fund managers listed at the end can be clicked on to navigate to the respective fund manager's website for more information on their ETF offerings. My observations are that some of those websites are not very friendly to the consumer though. They really need more work.

I have found it quite a lousy experience trying to figure out more information on the various ETF offerings. While each fund distributor has the details on their websites, what I want is to compare across the product offerings. I need something like Fundsupermart for Unit Trust.

Thus far, POEMS ETF Finder is probably the most useful avenue for this purpose. I'm typically looking for equivalent funds by sector/country, whether the ETF is a full replication or synthetic/swap type, whether it is a total return or dividend distributing type, etc.

There are confusing differences over what the fund is called by the fund manager versus what is encoded on trading portals. Takes quite a bit of decoding to figure out, else I could end up buying the wrong ETF! POEMS' use of symbols like "X" and "@" takes some figuring out. Turns out the "X" are ETFs which are synthetic type, while "@" are Specified Investment Products.

My believe is to diversify across regions and sectors as a risk management approach, something like this:

    SPDR S&P500 US$ - XD [Full replication]
    DBXT S&P500 US$ - Reinv [Synthetic]

    Lyxor Europe US$ - XD [Synthetic]
    DBXT MSEurope US$ - Reinv [Full replication]

Asia ex-Japan 
    Lyxor Asia US$ - XD [Synthetic]
    DBXT MSASPAC US$ - Reinv [Synthetic]

    Lyxor EM Mkt US$ - Reinv [Synthetic]
    DBXT MSEmer US$ - Reinv [Synthetic]

    CIMBASEAN S$ - XD [Physical replication - sample]

    DBXT MSJap US$ - Reinv [Full replication]
    Lyxor Japan US$ - XD [Synthetic]

    Nikko AM Singapore STI ETF - XD [Full replication]
    SPDR STI ETF 100 - XD [Full replication]

    Lyxor Cmdty US$ - XD [Synthetic]
    GLD US$ [Full replication]

* XD = dividends are distributed; Reinv = dividends are reinvested; US$ imply that ETF is traded in US$ currency.

There are more options from the wide basket of ETFs available. Above is hence only illustrative.

To keep costs low, the expense ratios of the various funds need to be considered. But in general, ETFs' expense ratios are usually much lower than Unit Trust funds.

There are more inherent risks with those "synthetic" type as they do not necessarily hold the basket of underlying shares in the index and are instead using swaps to achieve the index performance. Unfortunately, many of the ETFs are precisely of such synthetic type.

In some cases, there are non-synthetic alternatives that implement full or partial replication. In such cases, the ETFs will actually hold stocks from the benchmark index. Unfortunately, several of these ETFs do not distribute dividends and are therefore not attractive for investors who seek dividends as an income stream. Part of the reason for this is possibly the taxation regimes as dividends distributed would be subjected to tax, resulting in immediate dilution.

I have not considered Bond ETFs. There are several options available as well.

No perfect answers. The market likes to force us to make choices.

No comments: