When the going gets tough, the tough go shopping for cheaper and simpler investment alternatives.
Given that, it is little wonder that instruments known as exchange traded funds (ETFs) are gaining favour among retail investors, and this is further boosted by more firms offering ETF-linked products.
Listed on stock exchanges, ETFs are baskets of stocks that typically aim to track the performance of a stock market index.
For instance, if you invest in the DBS Singapore Straits Times Index (STI) ETF or StreetTRACKS STI ETF, you gain exposure to all the 30 stocks that make up the STI. ETFs can also be theme-driven, focusing on certain asset classes or commodities.
The main attraction is their low cost compared to traditional instruments such as unit trusts.
Because ETFs are passively managed, they carry zero sales charges and lower annual fees of about 0.5per cent a year, compared to that of a unit trust, which is about 1.8 per cent. ETF investors incur brokerage commissions whenever they transact.
An added push factor to invest in ETFs is that they have outshone many actively managed funds.
Said Mr Patrick Lim, associate director of financial advisory firm PromiseLand: 'The consensus based on long-term data is that most actively managed funds often fail to beat passive funds.'
Currently, Singapore has 38
ETFs covering worldwide equity markets such as Singapore, North Asia, the United States and Europe, as well as commodities such as gold.
But beyond the ETFs here, you can have access to more than 1,000 ETFs worldwide through ETF-linked products recently made available to retail investors.
However, chief executive of Grandtag Financial Consultancy Ben Fok cautioned that these products are not for everyone.
As the funds' performances are solely reliant on the adviser's ability to read markets and time their shifts correctly, these funds are more suitable for the moderately aggressive to aggressive investors who trust an adviser's investment capabilities, he said.
Also, ETFs have different levels of complexity. For instance, an ETF may make use of sophisticated instruments like swaps and futures to match the return on the index that it wants to track, said Mr Albert Lam, investment director at IPP Financial Advisers. By doing so, counterparty risk is introduced.
The use of swaps also means that losses can be compounded, especially during a period of negative performance.
As such, such ETFs should be used only by experienced short-term traders, advised Mr William Cai, director of GYC Financial Advisory.
Nevertheless, Singapore Exchange senior vice-president & head, private investors, Mr Andrew Ler, sees a very clear trend of fund managers and banks using ETFs in their portfolio allocation and product design.
The Sunday Times highlights three ETF-linked products and their pros and cons.
Providend Global Portfolios (PGPs)
Launched last October by wealth management firm Providend, the PGPs are believed to be the first such fund, comprising mostly
ETFs, to be launched here.
Said Mr Christopher Tan, Providend's chief executive: 'The key difference between PGPs and other funds of ETFs is that although we believe that most active managers cannot beat the market, active management can still add value in inefficient markets such as emerging markets.'
The PGPs are made up of a combination of ETFs - about 70 per cent - as well as actively managed emerging market funds. The annual management fee is 1.2 per cent.
Mr Tan added that because the portfolios make use of low-cost
ETFs sourced from all over the world and institutional tranche active managers, the overall cost to investors is still much lower than local funds'.
PGPs offer three investment portfolios - Growth, Alpha and Retirement - which are targeted at investors with different time horizons, risk appetites and investment objectives.
For instance, the PGP Global Retirement Income Strategy aims to achieve a total annual return of 8per cent with a potential 10.6 per cent deviation over the medium to long term. The returns include an annual 5 per cent payout based on the fund's net asset value.
Depending on your financial needs, you can be 100 per cent invested in one of the portfolios, said Mr Tan.
However, the PGPs are available only to accredited investors and the minimum investment amount is $200,000. Accredited investors are individuals with a net worth of $2million or whose annual income exceeded $300,000 in the preceding 12 months.
Pros
PGPs offer a low-cost means of investing which can translate into potentially higher returns than most actively managed funds over the long term, said Mr Lim.
Cons
The product is not accessible to the mass market.
Fulcrum Portfolios
Launched in June by financial advisory firm New Independent, Fulcrum gives investors access to more than 1,600 ETFs traded on 22 exchanges worldwide.
Said Mr Joseph Chong, New Independent's chief executive: 'ETFs permit us to go long and short efficiently while automatically achieving diversification and avoiding single-stock risks.'
In this case, 'going short' refers to Fulcrum's strategy of using inverse ETFs to potentially profit from a decline in the value of the assets. Inverse ETFs rise in value when their underlying asset falls.
There are two ways you can access Fulcrum: either via the Fulcrum discretionary wrap account which is available only to accredited investors; or the Fulcrum advisory wrap account which is available to retail investors.
The former has a minimum investment requirement of $1 million, and the latter, $100,000.
Investors who have an aggressive risk tolerance can place 100 per cent of their portfolio in Fulcrum, whereas for the more risk-averse, this can be pared down to half or less, added Mr Chong.
Fulcrum's annual target return is about 10 per cent in Singdollars. The annual management fee ranges from 1 per cent to 1.65 per cent. There is a performance fee of 15 per cent of portfolio returns, subject to certain conditions.
Pros
Fulcrum has the characteristics of investing in a hedge fund but with more control, transparency and lower costs, said Mr Lim.
The underlying instruments are lower-cost ETFs sourced globally, which translates to tremendous savings compared to unit trusts, he added.
Cons
They are not accessible to the mass market because of the minimum investment sum of $100,000.
Fulcrum portfolios are denominated in US dollars, so there are potential currency risks.
MyHome Fund
POSB's MyHome Fund, available since early this month, is a unit trust that invests in two ETFs that are managed by DBS Asset Management.
There are three options: HomeSteady (20 per cent equity and 80 per cent bond); HomeBalanced (50 per cent equity and 50 per cent bond); and HomeGrowth (80 per cent equity and 20 per cent bond).
The underlying ETFs are DBS STI ETF, which tracks STI's performance, and the ABF Singapore Bond Index Fund, which invests mainly in Singapore Government and statutory board bonds.
Its annual management fee is 0.5 per cent and the initial sales charge is 3 per cent.
Mr Lam suggests that the MyHome Fund may be suitable for investors who want to include Singapore investments as part of their asset allocation and who do not wish to actively monitor.
Pros
Accessible to retail investors because of low entry level of $1,000.
Helps investors to rebalance regularly at no additional charge between the two ETFs so that the initial allocations are maintained.
Apart from the initial 3 per cent sales charge, all fees charged on the underlying ETFs - 0.2 per cent on the DBS STI ETF and 0.15 per cent on the ABF Singapore Bond Index Fund - are returned as rebates back to the MyHome Fund. This is possible because DBS Asset Management is the manager of the fund and its underlying ETFs.
Cons
Mr Fok and Mr Lim find the initial sales charge of 3 per cent high for a passive portfolio.
Besides, the two ETFs are available on the Singapore Exchange, so retail investors may prefer to buy directly and incur a lower online brokerage fee of $25 per transaction, as well as lower annual management fees.
The DBS STI ETF tracks the STI which means the HomeFund investor may be too focused on a single country with a high bias towards the financial sector. This is because the top three firms that make up the STI are the local banks, said Mr Lim.
The fund's performance is completely dependent on the market performance, so investors should not expect the fund to overperform, said Mr Fok.
