SPDR STI ETF VS Nikko AM Singapore STI ETF: What's The Difference Between These 2 Straits Times Index ETFs On the SGX?

For those new to investing, putting your money in a benchmark index is one of the easiest ways to begin your journey. In Singapore, the benchmark index is the Straits Times Index (STI), and there are two ETFs – the SPDR STI ETF and the Nikko AM Singapore STI ETF – that we can invest in that track this index.

What Is really a Benchmark index?

We first need to comprehend what a benchmark index is.

A benchmark index of the country usually refers to the largest and many liquid stocks listed in a stock market. In Singapore, this is the Straits Times Index, or STI, is made up of the 30 strongest stocks listed in Singapore. This list includes DBS, UOB, OCBC, SingTel, Keppel Corporation, CapitaLand and 24 other blue-chip companies. Combined, these businesses comprise over 80% of the entire market value of stocks listed in Singapore, hence, it's representative of how the Singapore market performs.

In Hong Kong, the benchmark index is the Hang Seng Index, or HSI, made up of 50 of the strongest stocks indexed by Hong Kong. In Australia, it is the ASX 200, made up of 200 of the strongest liquid stocks indexed by Australia. In the USA, it is the S&P 500, made up of close to 500 of the strongest stocks on the New York Stock Exchange (NYSE) and NASDAQ.

A benchmark index also serves the objective of allowing investors to measure (or benchmark) their investment portfolio performance from the market returns. Of course, investors should try to beat the market returns in any given year, otherwise, they'd have been better off investing in the benchmark index rather than taking additional risks or actively managing their portfolio.

How To purchase The Benchmark Index?

We can't invest directly in the benchmark index. We have to depend on exchange traded funds (ETFs) that track the benchmark index by replicating its component stocks.

In Singapore, there's two ETFs that track the Straits Times Index: 1) SPDR STI ETF; and a pair of) Nikko AM Singapore STI ETF. We can invest in these ETFs in the same way we typically purchase other stocks listed on SGX – via a brokerage account (and by having a CDP account).

Thus, with just a single investment into either of these STI ETFs, investors are able to gain broad contact with the Singapore market.

Which Is Better – The SPDR STI ETF VS The Nikko AM Singapore STI ETF?

Since there are two STI ETFs, the common question is which should investors choose?

Both the SPDR STI ETF and the Nikko AM Singapore STI ETFs aim to track the Straits Times Index (STI) as closely as you possibly can. Here's a comparison of its differences to help make a decision on which STI ETF to invest in.

#1 Fund Managers

The most obvious difference would be that the two STI ETFs are managed by different fund managers. The SPDR STI ETF is managed by State Street Global Advisors Singapore Limited, among the largest fund management firms in the world. Nikko AM Singapore STI ETF is managed by Nikko Asset Management Asia Limited, one of the largest asset managers in Asia.

In this regard, both can be said to be equally matched because they are managed by reputable and stable fund management firms.

#2 Track Record

Track record is important when it comes to investing. SPDR STI ETF was on the SGX on 17 April 2002, while Nikko AM Singapore STI ETF was listed on the SGX on 24 February 2009.

As the SPDR STI ETF has been around longer, it has a longer history we can rely on for information. Nevertheless, both have been around for more than 10 years to check out their past track record.

#3 Fund Size

A larger fund is usually looked upon as more trusted, stable and better able to enjoy economies of scale.

Since the SPDR STI ETF has existed longer, it has also been able to capture a larger slice of investments in to the STI ETF. The SPDR STI ETF has $1.6 billion under management, while the Nikko AM Singapore STI ETF has $477 million under management.

#4 Performance

The performance of an ETF is usually based on how closely its returns are able to track the index it is trying to replicate. This also means that it will almost always underperform the market, because it charges a management fee and incurs trading costs while attempting to match the benchmark returns.

The SPDR STI ETF delivered a 1-year annualised return of -8.69% (as at Nov 2021). In the past five years, the SPDR STI ETF has delivered an annualised return of three.17%.

The Nikko AM Singapore STI ETF delivered a 1-year annualised return of -8.99% (as at Nov 2021). In the past five years, the Nikko AM Singapore STI ETF delivered an annualised return of three.02%.

Comparatively, the Straits Times Index delivered a 1-year return of -8.26% and a 5-year annualised return of 3.57%.

As you can observe, both the STI ETFs achieved a rather lower return compared to the benchmark STI. SPDR STI ETF were able to deliver a slightly better performance, however the margin is not that big.

#5 Expense Ratio

The total expense ratio (TER) measures how much of a fund's assets are used for its operations, including for administrative and miscellaneous reasons. The largest component of a fund's expense ratio is usually its fund management fees. Obviously, the low the expense ratio, the better it's for investors.

Both the SPDR STI ETF and also the Nikko AM Singapore STI ETF have an expense ratio of 0.3% per year.

While both STI ETFs technically charge the same amount, SPDR is actually receiving more money because of its larger asset under management (AUM).

#6 Tracking Error

If we ignore management fees, performing worse off than the market is always frowned upon. However, for ETFs, performing a lot better than the index is also not viewed as a positive thing. This is because its job is to replicate the market returns as closely as you possibly can.

The difference in replicating the market returns is usually referred to as tracking error. The SPDR STI ETF includes a rolling 1-year tracking error of 0.2833% (as at Aug 2021), as the Nikko AM Singapore STI ETF has a 3-year annualised tracking error of 0.17% (as at Nov 2021).

#7 Dividend

The component stocks inside the Straits Times Index usually pay out dividends. In fact, Singapore stocks are recognized to pay some of the best dividends across Asia. These dividends is going to be paid to the respective ETF, which will subsequently pay out these dividends to its investors.

Both SPDR STI ETF and Nikko AM Singapore STI ETF possess a distribution policy of paying out dividends semi-annually. Nevertheless, which means that the ETFs do not pay out dividends immediately every time it receives them from the investments. Instead, the STI ETFs hold on to the dividends, and pay it at regular intervals.

According to the SGX ETF Screener, SPDR STI ETF has a dividend yield of three.92%, while the Nikko AM Singapore STI ETF includes a dividend yield of 4.13%.

Read A: Here's How You Can Build A Dividend Income Portfolio To exchange Your Wage In Singapore

Why The STI ETF Constitutes a Logical Investment For Many

The STI ETF is a viable investment for both beginners and experienced investors.

For beginner investors, it offers a safe way to get started even with little investing knowledge or experience. We don't have to monitor our investments too closely, and can embark on a passive investing strategy, as our portfolio is instantly diversified with the 30 strongest stocks listed in Singapore. Of course, we can use this like a springboard to learning more about investing, and finally setting aside a portion of our portfolio to purchase individual stocks in Singapore as well as outside of Singapore.

Moreover, indexes are also regularly reviewed and adjusted, and then any changes made to the index is going to be replicated by our fund managers. As fund managers are simply replicating the adjustments made to indexes, their fund management fees are typically much lower than actively managed funds.

For experienced investors, it can be used as a great complementary passive investment strategy to diversify our risk, since we take on riskier investments in the market.