ETFs a useful tool for investors amid market volatility: BT roundtable panellists
Yong Jun Yuan
INVESTORS should consider making exchange-traded funds (ETFs) the centrepiece of their portfolio strategies amid heightened market volatility in recent months, said the panellists of a recent roundtable held by The Business Times.
Titled ‘Grow Your Portfolio with ETFs’, the roundtable was held on May 26 with the following speakers:
- SGX market strategist Geoff Howie
- FTSE Russell Apac head of equity index product management Emerald Yau
- State Street Global Advisors (SSGA) Apac head of fixed income and head of Singapore Ng Kheng Siang
BT correspondent Raphael Lim moderated the roundtable.
Howie noted that the Singapore Exchange (SGX) has seen strong demand for its ETFs from both institutional and retail investors.
Since the first Straits Times Index (STI) ETF was listed in April 2002, both STI ETFs on the index took about 17 years to accumulate assets under management (AUM) of S$1 billion in total.
Yet, it took only a further 17 months for both STI ETFs to hit S$2 billion in AUM, helped in part by the volatility of March 2020 when Covid-19 first struck.
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“During the very strong growth in AUM and ETF participation, particularly over the last 2 to 3 years, we’ve seen the number of retail investors who are active in our ETF market triple over a 3-year period,” Howie said.
On how investors could adopt ETFs in their portfolios, Ng said investors will need to stay nimble and respond to inflation and rising interest rates by augmenting their “core” portfolio with “satellite” portfolios to take advantage of specific trends and generate extra returns.
“That’s where I think (investors) can consider some of the regional ETFs. They can also consider global trends because some of these global trends could be very profitable over the medium to long term,” he said.
Yau noted that the STI — which is heavily weighted towards the 3 Singapore banks — has performed relatively well in the face of inflation and rising interest rates. The STI has returned about 4 per cent year to date, vastly outperforming the technology-oriented Nasdaq 100’s return of about -27 per cent.
While the STI has seen many transformations since it began as the Straits Times Industrial Index 56 years ago, she noted that this widely-followed local benchmark could continue to evolve to better represent Singapore’s changing market.
“Can there be another evolution? Anything’s possible, but it will depend on what the market needs, what the regulation requirements are,” she said.
Near-term macroeconomic challenges
Howie highlighted that energy, utilities and agricultural stocks are on the right side of macroeconomic trends such as rising commodity prices and inflation. On the other hand, technology stocks have taken a beating as they grappled with higher energy costs, supply chain constraints and interest rate hikes.
He went to say that the 5 most actively traded ETFs in the local market this year were a gold ETF, the SPDR STI ETF as well as ETFs for Hang Seng Tech counters, corporate high yield bonds and Chinese government bonds.
“China government bonds at the end of last year were yielding 2.8 per cent. I still think that’s pretty competitive with the US 10-year yields at the moment,” he said.
Among regional equity markets, he said Indonesia has performed strongly — with a total return of about 8 per cent year to date.
Farther afield, the FTSE Brazil index has returned over 20 per cent year to date. “They have large oil companies, commodities companies like Vale,” Yau said. “But as (it is) an emerging market, investors need to be a bit careful. Brace for the volatility. Watch out for the valuation surge year to date in the Brazil market.”
Another index that has been on a “stable footing” amid an inflationary environment is the FTSE global infrastructure index, while the FTSE Vietnam 30 could benefit from supply chain relocation and a potential upgrade from its status as a frontier market to that of an emerging market in the future, she added.
Howie added that gold could be a useful risk mitigator amid the volatility. “Gold is ultimately the least correlated asset class to all the other asset classes and, hence, still has that safe haven status,” he said.
He added that the World Gold Council suggests anything from 2-10 per cent of a portfolio ought to be allocated to gold when investors are faced with volatility.
Portfolio construction and strategies
Unlike individual stocks, which are driven by fundamentals and corporate actions of a specific company, ETFs tend to reflect macro conditions of entire industries or countries.
When selecting ETFs, investors should ensure the index it tracks matches their goals. In addition, the performance, track record and costs associated with the ETF should also be taken into account, said Ng.
One obvious advantage of ETFs over unit trust funds is costs. In particular, the brokerage costs associated with investing in an ETF are often lower than the upfront charges of investing in a unit trust fund.
“If you’re able to invest in a low-cost fee structure product, that itself would help you to minimise some of the expenses that you will incur over the long term,” he said.
Howie said the fees charged by ETFs have declined in recent years.
“Over the last 2 decades, the average fee paid for a fund has actually more than halved from ... 93 basis points in year 2000, to around 41 basis points on average in 2020,” he said.
Furthermore, Ng said, ETFs can lower the barrier to entry for certain asset classes, such as bonds.
“For fixed income investing, it’s very difficult for individuals to buy a single bond; but if you buy a bond ETF, that gives you the instantaneous diversification,” he said.
Yau said investors ought to closely examine ETFs that track indices with similar names. Indices from different providers can have components that are quite different.
“If you’re looking at an ETF, make sure you understand what that index is representing and whether it is representing what you’re actually looking for,” she said.
Ng said that while purchasing numerous ETFs may give investors a lot of diversification, it also means that they would need to spend a lot of time analysing all of them.
“If you look at your entire investment portfolio, perhaps you can divide it into several buckets and from there, you just choose 1 fund, or maybe maximum 2, to represent that particular sector that you have interest in,” he said.
Sustainable investing
There are, of course, risks with ETFs. One criticism is that ETFs can be most heavily weighted towards stocks that are overvalued. As more and more passive investors pile in, the ETFs themselves could potentially contribute to the formation of bubbles.
Howie also suggested investors educate themselves about the difference between conventional ETFs and synthetic ETFs.
While conventional ETFs directly hold stocks that are components of the indices they track, synthetic ETFs mirror the performance of their underlying indices with derivatives.
“At the end of the day, the product itself has, I think, been a game changer for financial services globally,” Howie said.
“You’ve got an index that you can invest in. It’s not a stock like Kodak that can lose its relevance. It’s an index that, in a way, is a portfolio strategy itself, always investing in the biggest and most actively traded stocks of your market,” he added.
As more investors seek out sustainable forms of investment, Yau noted that environmental, social and governance (ESG) factors are gradually being applied to indices.
“The methodology is evolving, given the market development. We certainly are seeing a need, not just in Singapore but across the globe,” she said.
Ng said some have called this a “generational” shift in terms of investment focus, so investors may be looking to incorporate some aspects of ESG into their investments.
He added: “I think sometimes it is hard to have everything 100 per cent ESG-compliant because it is tough, right, to really just find all the ESG assets. But I think we need to move there, I think the incremental move is an important signal.”
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