Those of you who have been reading my blog for some time would know that I have always had STI ETF as one of the components of my portfolio. I’ve written about it’s role in the Singapore version of the Bogleheads 3-Fund Portfolio and I’ve even wrote a series of detailed post analyzing the STI ETF performance over an 11 year period. That post concluded that investing in the STI ETF would have most likely provided good positive returns to a consistent long-term investor.
However, over the last few years, as my portfolio has grown larger, I’ve been slowly reducing the percentage allocation to STI ETF and in my recent journey update I’ve been considering to remove it all together. So what are some of the reasons why I feel the need to move away from STI ETF?
Well, let’s examine the original reasons why I had it in my portfolio in the first place and why it has lost its appeal to me.
Important: Does this mean STI ETF is a horrible investment and that you’ve made a mistake if you’re holding onto it? Not at all! It is still way better than holding cash and having your money uninvested, but it no longer meets my needs and investment goals. Here’s why.
This is not financial advice and you should do your own due diligence or consult with a professional financial advisor before making investment decisions.
Why did STI ETF make sense at the time?
Using it as the local fund
The first reason for the STI ETF that I mentioned as part of the Singapore version of the Bogleheads 3-Fund Portfolio is that it can take the spot for the local fund.
The local fund is meant to provide the investor with exposure to their own local market, in their local currency. This is meant to achieve 1 key objective: protection against anything that is happening outside of the country which the investor is living in.
Since I am living in Singapore, my day to day expenses will be made in SGD and my earning and spending power would be directly tied to the economic conditions of Singapore. Having a portion of my portfolio invested in Singapore would mean that I have a part of my portfolio that would move with the Singapore economy without as much fluctuations – in theory – compared to a portfolio without any local tilt.
It should also protect me against any sudden and wild currency exchange fluctuations which could cause my portfolio value in SGD to move up and down significantly.
It was cheap and easy to buy using a regular savings plan
The second reason was that it was cheap and easy to start with it at the time.
In 2016 when I started my investing journey, I had much less funds to invest on a monthly basis. I did not have a large lump sum to invest nor were there as many easily accessible robo-advisors at the time that provided a cheaper option.
If I wanted to deploy small amounts of funds into the market on a monthly basis, at the time it was easy and convenient to jump in with a Regular Savings Plan that buys the STI ETF every month – so that’s what I did.
It was eligible for SRS and CPF Investment Scheme
The last reason is that it was also eligible for investment using SRS and CPF Investment Scheme.
At the time, the investment options that were available for SRS and CPF-IS was quite abysmal. Most were high fees and actively managed unit trusts or mutual funds. The alternatives were investment-linked insurance plans and the like – not much of a choice there.
So compared to those other options, the STI ETF seems like a great option to help make up the local fund portion of the portfolio while allowing me to get tax deduction via SRS at the the same time – a win, win, win scenario.
So then, what’s changed now that has changed my mind?
Why does STI ETF make less sense now?
Singapore market is extremely small and very much dependent on global markets
If one of the benefits of having a local fund component in our asset allocation is to ensure we are somewhat protected against international market fluctuations, then this might not be possible for Singapore.
Unlike America, Canada or the EU, Singapore is an extremely small country that is very heavily reliant on international trade and economy, so any movement of international markets will inevitably affect the performance of Singapore businesses. While this is true for different markets in various degrees, it is especially true for Singapore.
So the degree of risk mitigation by investing in STI ETF is not a lot – especially since quite a large portion of the index is in the Financial Sector which is very heavily correlated to global market performance.
Currency fluctuations shouldn’t be an issue
Now I’m not an economist so this is just an opinion borne out of my own anecdotal experience – but I don’t think we’d have to worry too much about currency fluctuations if we are investing in global equities.
Remember, when we are buying global index, we are buying shares of global companies. These shares are in all sorts of currencies which are then priced into the ETF or index that we buy. While these ETF or index are then priced in USD or GBP or EUR, these are just the currency that the ETF or fund is listed in. If the USD as a currency loses value, the shares and companies will have to be re-priced to give it fair value so the share price should increase relative to the USD since the USD is dropping.
Of course if the USD loses value, the economy and markets would be impacted which could cause the business performance to decline (which will also likely impact Singapore.) However this is not due to the currency exchange rate fluctuations.
Plus, since Singapore is so heavily reliant on global trade, it is extremely important that the Singapore Dollar is kept as stable as possible against other global currencies. This is one of the key function of the MAS and they work actively to keep currency fluctuations between SGD and other basket of currencies within a reasonable margin.
This is why I found holding STI ETF as a hedge against currency movements less and less useful.
Global investment has better growth potential
Over the last almost 6 years of investing, it has become very clear that while Singapore is relatively stable, the growth potential of the Singapore economy is much more limited compared to the rest of the world.
In my most recent journey update post, after about 6 years of investing in the STI ETF, the index has returned an annualized 3%. Not negative and still better than Fixed Deposit returns… but it’s no where near the 19+% return of the developed market (IWDA) and even the 7.8% return of the developing market (EIMI.)
Ultimately, given the size of Singapore and its economy, it’s less likely that the growth driver of the world economy will end up being companies within Singapore – especially less so within the 30 companies that are in the STI ETF.
So it is better to cast the net wide and instead of allocating larger than necessary portions of the portfolio to Singapore and let the Global Index do the job of allocating the market cap weightage to the country instead.
Increased options to cheaply invest in international funds
Over the last few years there has also been increased competition in brokerages in Singapore that allows investors to invest in international stocks and ETFs for very low fees. This has made DIY investing even with lower amounts of funds each month viable.
Of course, over the past few years my income has also increased which also helps in allowing me to invest more cheaply and more often – removing the advantage of investing in Singapore-listed ETF.
Rise of low cost, passive investing options for both SRS and CPF
Related to the increased options, we’ve also seen the rise of robo-advisors like Endowus in Singapore which offers low cost access to the stock market. Some even offers great access to passively managed mutual funds which is perfect for an index investor.
While they are never going to be as cheap as DIY for cash investments, they provide the best option for index investors who would like to do the same with funds in their SRS and CPF. As a result, investors are no longer limited to the poor investment options of the previous years.
So what am I investing in instead of STI ETF?
Shifting my cash portion to VWRA
So for the DIY portion, I am shifting any STI ETF allocation here to VWRA to capture the entire global market. There wasn’t much left here since I’ve already slowly reduced my STI ETF holdings to just 5% previously which was mostly in my SRS account.
And as for SRS…
Shifting my SRS to Endowus Dimensional World Equity Fund
Since there are limitations on what funds in SRS can be invested in, I am making use of Endowus to get access to the Dimensional Funds at a relatively low fee.
The fund I selected is the Dimensional World Equity Fund which invests in both developed and developing market equities.
That’s it, that should basically remove all allocation to STI ETF from my portfolio allocation.
In my future progress updates, you should see no mention of the STI ETF at all and this post explains why.
Again, this does not mean that the STI ETF is a horrible investment. My previous analysis on the returns of the STI still holds true, investing in the STI ETF will provide you with decent positive return over the long term. However, it no longer addresses my needs and investment goals and I believe that global index will be a better alternative for me.
Until next time!
11 thoughts on “Removing STI ETF from my portfolio”
I wonder if you have information on your expenses ratio from DCA into STI ETF via POEMS, and your projected expenses ratio with Dimension.
I do keep track of all trades and fees for my STI ETF and we know the expense ratio of the ETF so this should be doable. Of course I’ve only started with Dimensional but we can just go off their fund fees + Endowus access fees. Let me dig this up after work today.
So I’ve taken a look and the STI ETF (ES3) has an expense ratio of 0.3% and the RSP transactions to buy it with S$1,000 which I was using has a brokerage fee of 0.642%.
Compared to Endowus, there is no brokerage fee, just the 0.3% access fee and 0.35% fund management fee charged by the Dimensional Fund. Couple this with the higher diversification and higher growth potential, Endowus + Dimensional Funds is a clear winner.
1. What do you think about the 0.3% access fees levied by Endowus? While it does not look significant at first sight, the fees will compound in conjunction with your SRS portfolio with time.
2. I see the merits with transitioning out of STI into global indexes. Any comments regarding why VWRA instead of SWRD/EIMI?
Great post, thanks for sharing!
Hey thanks for reading!
1. 0.3% is high and of course lower is better, but the difference in diversification and also growth potential makes up for the access fee and also the higher fund management fee of Endowus + Dimensional Funds. So I think this is just the price we have to pay for this at the moment. Hopefully it comes down further as Endowus gets more AUM.
2. I only choose VWRA now because I intend to keep the allocation pretty much close to the global market cap, so VWRA is just easier and less manual rebalancing (which means less transaction fees also.) I used to do IWDA/EIMI myself (and still hold quite a bit of IWDA, which is the same as SWRD, just slightly higher fee) so that’s perfectly fine! This is more for convenience.
Hope that helps!
Many thanks for sharing your thoughts in a concise manner. Truly appreciate it.
The dearth of good SRS investment choices has been a major bugbear for me, and Endowus comes the closest.
I wish you all the best in this decision and do keep your readers updated – cheers!
Thanks for sharing!
Just wondering what’s your allocation based on the global market cap currently?
Hey Jowell, at the moment I’ve kept all my IWDA while only adding to VWRA. I’d say I’m quite overweight developed markets today – probably more than 95% developed markets and less than 5% developing markets at the moment, which is fine for me for now. I’ll continue to keep adding to VWRA going forward to keep things simple so the share of developing markets should increase over time but given that I’m not going to sell my IWDA, I’ll continue to be overweight developed markets for the foreseeable future.
Hi! Just want to know what do you think about DCA into SCHD/SCHG despite the 30% withholding tax. Personally, I do not have much capital to start with so was hoping to lean more towards growth and SCHD seems to have performed very well and even with the 30% tax, it will still net about 2% in Dividend yield. Am 23 and new to this FIRE journey, any advice or feedback would be appreciated! If i am more concerned about growth, would i be better off with VWRA/IWDA/VT and then rebalancing in future to a higher dividend yielding portfolio as the goal would be to live off dividends.
this post hasn’t age well….
Haha you’re right! The timing has been a disaster as STI has outperformed the global markets! Though this decision is a long term one away from local bias and I still think was a good call, even if the near term result is bad. That’s the nature of investing after all. Time will tell if this was the right call 20-30 years down the road!
Thanks for reading!