The Ultimate Comprehensive Analysis of The 11-Year Returns of the STI ETF: Part 1 – Dollar Cost Averaging

This is part 1 of a 4 part series. I started off trying to write a single article but the amount of analysis grew too large to fit into a single post, so I’ve decided to split it up into the following 4 parts:

• Part 1 : The 11-year performance of Dollar Cost Averaging into the STI ETF.
• Part 2 : Multi-Period (5-Year to 10-Year) Rolling IRR if you DCA into the STI ETF.
• Part 3 : Multi-Period (5-Year to 10-Year) Rolling IRR for Lump Sum Investing into the STI ETF.
• Part 4 : Comparing the performance of DCA vs Lump Sum.

“If ya want something done right, you’ve just gotta do it yourself!”

Or in this case, it’s more like:

“If I want something overly-done, I am the only one stupid enough to take the time to do it.”

So… I’ve just finished crunching the numbers on my portfolio’s returns if I had invested S$1,000 a month, every month into the STI ETF while reinvesting dividends over the last 11 years! Took me forever but the results were worth it.

Man… I need a hobby…

Oh well, what’s done is done… So I might as well share the results! I think it will surprise you; it sure surprised me.

For those afraid of long posts, here’s the summary of the results, and if you’d like to read the gory details, you can scroll down to read more.

TL;DR: Summary of findings

1. Over the last 11 years, if you DCA into the STI ETF and reinvest the dividends, you will have received an inflation adjusted return of 5.63%, which is 7.15% non-inflation adjusted return.
2. More than 57% of the time in the last 11 years, the STI ETF returned more than 6% in inflation adjusted returns each year.
3. Not reinvesting your dividends and reinvesting dividends provided the same rate of returns in the last 11 year period.
4. STI ETF remains one of the best investment vehicle for long-term Singapore investors who wishes to setup a lazy Bogleheads 3-Fund Portfolio and put our financial independence plan on auto-pilot.

Why in the world did you spend your time doing this?!

As Singaporean investors, when we talk about a Singapore-Dollar-denominated broad-based diversified stock index, the only good option we really have is the Straits Times Index. Even though it only has 30 companies, it’s the best we’ve got.

Then if you want to invest in a Singapore-Dollar-denominated broad-based low-cost diversified exchange traded fund (ETF), then you only really have the STI ETF.

That is why the STI ETF, both the SPDR Straits Times Index ETF (ES3) and the Nikko AM Singapore STI ETF (G3B), are featured so prominently in my post on Building a Bogleheads 3-Fund Portfolio in Singapore and many other personal finance blogs.

However, how good is it really? How much returns can investors expect for investing in the STI ETF on a long-term basis?

Since I’ve recommended that Singaporeans have it as one of the core ETF in their portfolio, I wanted to get the numbers to back it up. Especially since in the last 11 years, the STI ETF chart looks like this:

Hmmm… *squints at the start price in 2008 and closing price in 2018*

Doesn’t look too impressive right? We started pretty much where we ended up at the end of the 11 year period. Most of the time it was just moving sideways. So how good can the STI ETF be for growing our hard-earned money really?

If the chart looks like this, wouldn’t I do better by putting my money elsewhere? Should we trust the advice that’s been thrown around about Dollar Cost Averaging (DCA) and long term investing into the STI?

Great questions, and you’re in luck! This analysis is meant to provide the answer to those questions and be as thorough as possible.

But hang on. Since the STI ETF has been around a while, surely there must have been other analysis done?

Other currently available analysis of the STI ETF returns

In the quest to find answers, I’ve been digging around the interwebs but have not been able to find any analysis that really answer all of my questions. The best analysis I could find were these 2 articles:

• Your Returns if You Dollar Cost Average into the STI ETF by Kyith of Investment Moats. Kyith’s article analyses the Dollar Cost Average (DCA) returns of the SPDR Straits Times Index ETF returns over 10.62 years and compares it against other investment vehicles that is available to Singapore investors. It’s a great article and Kyith covered both the basics of calculating the rate of return and provides good comparison with other asset classes.
• What Is Your Returns If You Dollar Cost Averaged Into The Straits Times Index Exchange Traded Fund (STI ETF) For The Past 8 Years by Ming Feng of Seedly. Ming Feng’s post looks at the returns of DCA returns of the Nikko AM Singapore STI ETF and covers the 8 years between 2010 to 2017. These 8 years start right when the STI ETF started recovering from the 2008 financial crisis, so although the returns look healthy it may not be repeatable without another crisis.

Although both articles are good, detailed and well-written, there were more analysis that I wished were covered.

What I wanted to see covered

• Neither article looked at reinvesting dividends and how it will impact returns. Conventional wisdom tells us that reinvesting dividends increases our total returns as it allows our dividend to compound over time. Would that have been true with the STI ETF?
• What are the most probable returns that we would have gotten from the STI over time? Are we more likely to receive 1%, 2% or 5% return? We should try to track the returns over time to find what level of returns are more or less likely.
• How does Dollar Cost Averaging compares to Lump Sum investing when it comes to the STI ETF during the same time period? The standard recommendation within the FIRE community is that lump sum better than DCA most of the time because if the market always go up in the long run, you should buy now when stocks are cheap. However, unlike the S&P 500 or VTSAX, the STI – being made up of just 30 stocks – is much more volatile and the “self-cleansing” nature of a stock index and the strong upwards pressure may not be as pronounced. (Covered in Part 2 & Part 3, coming soon.)
• How does inflation affects the returns? I don’t think either articles covered this, I assume that all figures stated were not adjusted for inflation. Since we’re talking about long-term investments, the rate of inflation will affect our returns so it would be good to see that taken into account.

Since I really wanted to scratch this itch and feed my curiosity, I decided to get down and dirty to do the analysis myself!

So if you’re ready, let’s dive in!

WARNING: Hardcore maths ahead! For science!

So what’s the setup and how are you calculating the returns?

We will be taking a look at the SPDR Straits Times Index ETF (ES3) in this analysis, so when I say “STI ETF” going forward, that’s the one I’m referring to. Why? Because it’s the bigger of the 2 ETFs as well as it’s the one I’m investing in using my POEMs Regular Savings Plan so it only makes sense that I want to know how it performed.

Here’s the investment setup:

Source of Inflation Data: Data.gov.sg

Why adjust for inflation?

Why the difference between the Total Amount Invested (Absolute) and Total Amount Invested (Inflation Adjusted) you ask? It’s because S$1,000 in 2008 and 2018 are not worth the same. With inflation, the value of the dollar erodes over time and so S$1,000 in 2008 is actually worth more than S$1,000 in 2018.

When we adjust for inflation, we’re looking to see how much all the money that was paid or received leading up to today is worth in today’s dollar. That is why in total, after adjusting for inflation, we actually spent closer to S$141,000 after 11 years of investing S$1,000 rather than S$132,000.

Once we adjust for inflation, we can compare every investment scenario on equal terms – in the value of today’s dollars.

Measuring the returns

In order to calculate the returns of this simulation, I will be using the Internal Rate of Returns (IRR) which will give us the “annual returns”, the rate at which an asset will appreciate per year. This returns rate can then be used to compare with the expected returns of other assets such as Fixed Deposit rate or the Singapore Savings Bond (SSB).

In order to calculate the IRR of this investment, I will be using the XIRR function in excel to calculate our returns for each month. This will let us map the returns of the STI ETF over time, after 2 months, 3, months, 50 months, or 132 months.

At the end, we will see the returns of the portfolio if I sell all of the STI ETF shares in my entire portfolio on the 10th of January 2019 after 11 years of buying every month.

Without further adieu, here are the findings.

11-Year Internal Rate of Returns of the STI ETF with Reinvested Dividend

Before we get right into the numbers, here’s what this investment looks like summed up in a chart of total portfolio value the total investment over time – already adjusted for inflation:

Huh… wait… that looks pretty promising compared to our price chart earlier that looked like it barely moved. Also notice that aside from the one or two years, the portfolio value has always stayed above the amount of money that has been added to the portfolio – even during times when the market dropped sharply like at the end of 2011 and 2015.

So what was the actual return? Here are the hard numbers:

This means that in the past 11 years, between 10th January 2008 and 10th January 2019, the STI ETF returned on average 5.63% each year after accounting for inflation.

Since the average inflation in the past 11 years was around 1.5%, even the CPF Special Account would have provided less than 3.5% in real returns, even if you account for an extra 1% of bonus interest! So far, the STI ETF looks like a good deal.

Note: The reason I also provided the non-inflation adjusted returns is so you can use this number to compare with other assets being advertised today. When you see the CPF rates (like 5% or 4%) these are not yet adjusted for inflation so you should compare it with the “Not Inflation Adjusted” column.

How IRR changes over time

Since you only get a return on your portfolio when you receive dividend or sell your shares – and we reinvest all of our dividends – the only time we make a return is during a sale. This means that our rate of return is determined by the price when we sell and that is constantly changing over time.

How does that look like for our investment portfolio? Is 5.63% return just a fluke due to an unusually high price at the time of sale?

Let’s map out the rate of returns of our investment over time by calculating the rate of return for each month by assuming that we’d sell our entire portfolio on the 10th of each month:

The rate of return is affected by the length of your investment, it is highly sensitive to price movement in the beginning of the investment period and becomes more stable over time. That is why you see huge volatility earlier on that stabilizes as time goes by.

But what’s the return you will normally get?

The volatility in the beginning obscures the more subtle changes later on but it does seem that most of the time, the returns hover between 6 and 9%. Let’s make that clearer by taking a look at the distribution of the returns over the last 11 years in a histogram.

This chart makes it super clear that although there are pockets of negative returns, the majority of the time, it is on the positive side for the last 11 years. To make this chart easier to digest, I combined all the negative returns into one group, and anything above 13% return into another group so we can zoom into the 6-9% mark.

Great! Now we can actually see that the majority of the time, the returns for STI ETF in the last 11 years is often positive. Out of 132 periods, only 13 of those had returns of less than 0% and 27 of those had returns between 6% and 7%.

Broken down into a table, this is what that looks like:

The total occurrence is 131 not 132 because the first period does not provide a return.

Very fascinating!

If you read the table, you can ask it a lot of questions and get very clear answers. For example:

1. “How often did the STI ETF return more than 6% real return a year?” – You can look down the “IRR” column to find “6 – 7%” and across to the “Reverse Cumulative %” column to see that the STI ETF returned more than 6% at 57.25% of the time if you started 11 years ago.
2. “How often did the STI ETF return less than 4% real return a year?” – Since our CPF Special Account (even with bonus interest) only returns 5% (less than 3.5% real return) a year, this is a question we might want to know the answer to. We can look down the “IRR” column to find “3 – 4%” and across to the “Cumulative %” column to find that in the past 11 years, the STI ETF returned less than 4% only 22.90% of the time. Very handy!

Using this table, you can also see that the STI ETF returns between 5% to 9% more than 50% of the time and it returned more than 5% per year at 70.23% of the time in the last 11 years!

With that kind of odds, it’s no wonder why I have no qualms about having the STI ETF as one of the core parts of my portfolio.

What if I don’t reinvest the dividend? How badly am I impacting my returns if I spend the dividend instead?

Here comes the interesting part. Let’s repeat the same simulation, but this time, we will not reinvest any of the dividend. Instead we’ll use the dividend to offset the capital injection if any, and whatever that’s left, we’ll take out to spend. A person’s gotta eat right? Dividend is a great way to live off your investment without having to sell shares after all. So how will that affect the final portfolio returns? Here’s the setup:

(From now I will refer to reinvesting dividend as “RD” and not reinvesting dividend as “No RD” so it’s shorter to read and write.)

The first thing you’ll already notice is that the Total Amount Invested (Inflation Adjusted) is actually lower than the absolute amount invested! How is that possible?

This is because we have to account for withdrawing the dividend, this actually reduces the net amount we’ve invested. This helps reduce the total cost of the portfolio.

Now, of course, since we don’t reinvest the dividends, we won’t be able to buy as many shares. Here’s what the Total Portfolio Value and Total Investment looks like against the same chart for when we reinvest the dividend:

As you can see, although the Portfolio Value for No RD ended up much less than if we did reinvest, their total cost (Total Investment) is also lower as they received income from the dividends over time. It’s hard to tell here which performed better.

In order to compare properly, we will have to take a look at the chart for the percentage gain over time:

What’s this? It looks like they both performed almost exactly as well until near the end where the gain from No RD is higher than reinvesting? Although it’s quite a small difference (less than 2%), that’s an unexpected result… we’d normally expect reinvesting to outperform. What’s going on here?

Why is the percentage gain from reinvesting dividends lower than if we don’t reinvest?

The conventional wisdom is that reinvesting your dividends should provide a greater return as you allow your dividends to compound over time rather than take it out of the investment pool.

So what could be causing this odd behavior? Right now I’m not 100% sure but my suspicion is that whenever dividend is paid, the gain from purchasing more shares by reinvesting is similar but not quite as good as the cost reduction by pulling out the dividend.

It’s possible that given that all else being equal, the inflation rate is playing a role in helping to boost the effect of getting money out earlier. If any of you have any ideas you’d like to test out to get a clearer answer to this conundrum, I’m all ears!

What about the real rate of returns between the two?

Good question, looking at just the percentage gain isn’t always useful, it’s always better to compare the rate of return.

When the real rate of return for both scenario is put into a chart, it’s exactly the same over time!

This is because the XIRR formula has already taken into account the cash flow from withdrawing the dividend vs reinvesting it back into your portfolio.

Overall because reinvesting the dividend just means that you’re deferring receiving the dividend until later (when you sell your shares) your overall rate of return remains the same whether you reinvest the dividend or withdraw it to use earlier.

Here’s a table of the final results of both reinvesting dividends and not reinvesting:

A few points to note:

• Cumulative units of shares is lower for not reinvesting dividends. This is expected as the dividend is withdrawn instead of used to purchase more shares.
• The Average Purchase Price for RD is slightly higher than not reinvesting. This is because the dividend is being used to purchase more shares over time as the share price increased so naturally the average cost of the shares will increase as well.
• Total Dividend is higher for RD than No RD. This is due to having more shares to pay out dividends over time as the dividend is used to purchase more shares.
• Although Inflation Adjusted Gain percentage for No RD is higher than that of RD, the inflation adjusted and non-inflation adjusted 11-Year IRR are almost exactly the same across both options.

So what’s the verdict? Reinvest or don’t reinvest the dividends?

Since the overall real returns from both options are the same, how should be look at these options and decide between them? Here’s my take:

1. Reinvesting dividend trades getting cash flow from dividend now into the total portfolio value and higher accumulated units of shares over time compared to No RD.
2. As FIRE practitioners, we are attempting to build our portfolio to hit our “FIRE Number” – a number which will let us live on our investments forever. This means that the investment method that gets our portfolio to that point quicker is the best strategy.
3. During our accumulation phase, we will be working to earn income and do not require the income from dividends to supplement our income and cover any costs.
4. If you wish to live off of dividends once you retire, it’s best to reinvest the dividend so you accumulate more shares of the STI ETF quicker. By the time you retire, you will have much more units and thus a higher dividend payout to live on.

Based on the above 4 points, clearly reinvesting dividends is the best option and is the option I am currently using. Your situation may be different though so if you do need the income from the dividend right now, taking the dividend to cover expenses may be better for you.

How does STI ETF compares to other investment vehicle?

Now that we have the detailed data from all the calculation that I just did, we can make direct comparison between the returns of the STI ETF and other asset classes. Here are the current rate of return of popular investment products today (not adjusted for inflation, so compare it with the 7.15% return of the STI ETF):

Average inflation rate in the last 11 years: 1.54%

It’s almost not really a comparison here. Of course, it’s probably not fair to compare the returns of a stock index to safer investments as shown above, but the takeaway is clear:

• For SGD denominated investment, it’s hard to beat the STI ETF in terms of returns.
• A lot of the safe investment vehicles either barely keeps up with inflation or are very restricted (CPF.)

The only other investment vehicle that could potentially beat the STI ETF are REITs (as touched upon by Kyith of Investment Moat in his STI ETF article.) However, I haven’t done the detailed research on that and that could be a good place to analyse after this. (Stay tuned!)

However, if you are waiting on the side-lines, I think the STI ETF remains one of the best options for parking any investment capital that you do not need in the short term.

OK great, so how do I invest in the STI ETF?

As far as I can tell, every brokerage firm in Singapore allows you to invest in any stock listed on the SGX and both STI ETF are listed there. As long as you have a brokerage account, you should be able to purchase either of the 2 available STI ETF:

• SPDR Straits Times Index ETF (ES3)
• Nikko AM Singapore STI ETF (G3B)

However, one of the most important consideration when selecting your investment platform is cost. The current investment platform I’m using “POEMs” by Phillips Capital provides a Regular Savings Plan which allows me to automatically buy a fixed value of shares each month starting at a cost of $6.42 per month.

If I only invest S$100 a month, the S$6.42 transaction cost will be 6.42% of my investment! Which is exorbitantly high! However, if I instead invest S$1,000 per month, that same S$6.42 fee is now only 0.642% of the transaction, much better. This is my current monthly setup and is the setup I used for calculations in this post.

What would returns look like if costs were higher than 0.642%?

Here’s a table for those curious:

Clearly keeping costs low will be important for your portfolio return. So keep it as low as possible. So if your broker has transaction costs structured with a minimum fee, it’s always better to push up your investment amount to minimize the transaction cost as a percentage of the total investment.

There are a lot of regular savings product available today to help you invest in the STI ETF with DCA and also reinvests the dividend automatically for you at very low cost. Phillip Capital’s Regular Savings Plan is one and POSB Invest Saver is another. You can read Kyith’s comprehensive guide to POSB Invest Saver for more information on that one.

Update: Seedly also has a very comprehensive analysis of which regular savings plan is the cheapest. It lists all of the available plans and gave a very good breakdown. You should check it out.

I may do one of my own posts on the best platforms to use in the future so stay tuned.

What does this mean for us folks on the FIRE path?

Phew, that was a long analysis. I hope you’re still following along. So based on these results, what kinds of conclusions can we draw and how should we – as people pursuing financial independence in Singapore – interpret this information to apply to our investment portfolios?

Here are the key takeaways:

1. DCA investing into the STI ETF is a great way to build up the local currency portion of your lazy 3-Fund portfolio and it has provided great returns over the last 11 years even through the last financial crisis.
2. In terms of real returns of the entire investment, it does not matter whether you reinvest the dividend or take it out to be used. Taking out the money just means you get to enjoy the fruits of your investments sooner but at the expense of the future size of your retirement nest-egg.
3. If you do not reinvest your dividends, you will reach your “FIRE Number” later than if you were to reinvest the dividends.
4. Reinvesting your dividend into the STI ETF is the way to go for your if you do not need the cash flow from the dividend to cover expenses. It allows you to quickly build up the portfolio value during the accumulation phase and build up more units of shares such that the portfolio can provide higher dividend income during your retirement.
5. Minimise costs while you invest into the STI ETF, if your brokerage offers a fixed cost structure, try to increase your monthly investment so the percentage of the investment that the transaction cost takes up is lower.

I hope this analysis was interesting and helpful for you as it was for me. Now I can continue to invest into the STI ETF with more confidence and understand that I’m on the right path.

My next post will go into the details of whether Lump Sum investing into STI ETF is better or worse than DCA. If you’ve ever wondered whether you should put all your annual bonus into the STI right away or spread it out over time, then that’s what we’ll be looking at in the next post. Since it takes some time to run these types of simulation and compile the results, it might take a bit of time. Stay tuned!

As always, I welcome all comments and feedback (and even corrections if you spot any mistakes!) I’d love to hear from you about what I’m doing well and what I’m not so I can improve my posts to make it easier to read and understand.

You can also follow me on twitter if you want to have a conversation by tweeting @firepathlion! Thank you for reading!

If you enjoyed this post, it would make my day if you could help share this article with your friends who might also find it interesting. Thank you!

Until next time.

FPL