singapore exchange fundaments of etfs sgx academy speaker – puah soon lim, cfa 15 august 2015
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Singapore Exchange
Fundaments of ETFs
SGX Academy Speaker – Puah Soon Lim, CFA
15 August 2015
2
Disclaimer
This document is (a) intended for general circulation in Singapore and (b) not intended for general circulation outside of Singapore. This document does not constitute an offer or solicitation to buy or sell any investment product(s). It does not take into account the specific investment objectives, financial situation or particular needs of any person. Investors should seek advice from a financial adviser before investing in any investment products or adopting any investment strategies. In the event that the investor chooses not to seek advice from a financial adviser, he/she should consider whether the product in question is suitable for him/her. The investment product(s) discussed herein are subject to significant investment risks, including the possible loss of the principal amount invested. Any examples provided are for illustrative purposes only. Past performance of investment products is not necessarily a guide to future performance. SGX and its affiliates may deal in investment products in the usual course of their business, and may at any given time be on the opposite side of trades by investors and market participants. Any statements or information expressed by other organisations are of the respective authors. SGX and its affiliates make no warranty as to the accuracy, completeness, merchantability or fitness for any purpose, of the information contained in this document or as to the results obtained by any person from the use of any information or investment product(s) mentioned in this document. SGX undertakes no responsibility to update this document. SGX reserves the right to make changes to this document from time to time. In no event shall this document, its contents, or any change, omission or error in this document form the basis for any claim, demand or cause of action against SGX and/or any of its affiliates and SGX and/or its affiliates expressly disclaim liability for the same. In the event that the circulation of this document constitutes provision of financial advisory services, please note that SGX is an exempt financial adviser under the Singapore Financial Advisers Act (“FAA”) and is exempt from certain provisions of the FAA, when providing financial advisory services or making recommendations to accredited and/or expert investors, and overseas investors, as provided for under Regulation 34, 35 and 36 of the Singapore Financial Advisers (Amendment) Regulations 2005. This document is being made available to only certain qualified recipients outside Singapore. In the event that this document or any part thereof is recirculated, transmitted or otherwise distributed in any format to any other person by a recipient, such recipient will have the full responsibility to ensure that such recirculation, transmission or distribution complies with all applicable laws, rules, regulations and directives in all the relevant jurisdictions. SGX and its affiliates hereby disclaim all responsibility and liability arising in connection with such recirculation, transmission or distribution.
© SGX
Welcome to SGX 3
“Let me add a few thoughts about your own investments. Most investors, both institutional and individual, will find that the best way to own common stocks is through an index fund that charges minimal fees. Those following this path are sure to beat the net results (after fees and expenses) delivered by the great majority of investment professionals.”
Berkshire Hathaway Shareholder Letter, 1996
Exchange Traded Funds
What is an Exchange Traded Fund? Are ETFs suitable for everyone? What to watch out for – what can cause me to lose money? Key questions to ask or considerations before buying an ETF
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 20150
500
1000
1500
2000
2500
3000
3500
Global ETF Asset Growth
5
$3 trillion and growing
Source: Bloomberg, as at 30 April 2015
CAGR = 29.18%
What is an ETF?
Welcome to SGX 7
An ETF is
…like a Unit Trust
It’s Structured
It’s managed
It’s regulated
Welcome to SGX 8
An ETF is
A Unit Trust with a twist
Exchange
Traded
Listed on an (like a stock)
Intraday(like a stock)
What is an ETF? Two great investment ideas brought together
ETFs
DiversifiedTradable during the
day
Diversified funds that trade
like stocks
Unit TrustStock
26
ETFs are like stocks but they differ in some important ways
27
ETFs ≠ Stocks
26
ETFs are like Unit Trusts but they differ in some important ways
Welcome to SGX 13
It is like a Unit Trust but…
$80,000
12
6
39
Unit Trust ETF
12
6
9 3
End of Day NAV Indicative Real Time NAV
Delayed Execution Instant Execution
Welcome to SGX 14
Unit Trust Benchmark Against An Index
Unit TrustBenchmark
Welcome to SGX 15
Unit Trust Benchmark Against An Index
Unit TrustBenchmark
16
Source: S&P SPIVA Scorecard 2012, “S&P Indices Versus Active Funds (SPIVA) Scorecard”, S&P Research, 2012 at http://www.spindices.com/documents/spiva/spiva-us-year-end-2012.pdf.
Average Investors Vs Markets
Welcome to SGX 18
ETFs Track The Index
19
How does an ETF track an index?
Full replicationInvesting all or substantially all of its assets in the constituentsof the underlying index, broadly in proportion to the respectiveweightings of the constituents in the index.
Sampling approachBy stratifying or dividing an index into manageable risk elementsor buckets to replicate the underlying index performance.
Optimisation approachBy investing in a portfolio featuring high correlation to the indexto minimise index tracking error.
Synthetic replicationThrough the use of financial derivatives or embeddedfinancial derivatives to replicate the index performance
Four Methods of Tracking:
Invest in physical
securities
Welcome to SGX 20
Passively Managed
Lower Fees and Charges
ETFs allow investors to gain exposure to asset classes at lower cost
No Sales
ChargeLow
Management Fees
Intra-day Pricing
Costs Matter
What is the return?
C A P T LI A
SNI
G
SDNEDIV
D
Why do people invest in ETFs?
• Efficiency• Transparency• Flexibility
Why do people invest in ETFs?
• Gain exposure to major asset class without the need to do security selection
• Instant diversification• Pays no sale charge• Low transaction fee
Efficiency
Why do people invest in ETFs?
• Daily information about underlying stocks• Real-time intraday pricing
Transparency
Why do people invest in ETFs?
• Traded like a share• Applicable to a wide range of strategy
Flexibility
SGX The Asian Gateway
Why do people invest in ETFs?
Are ETFs suitable for everyone?
M A Y N O T EB
Risk: What to watch out for?
• Market risk• Tracking error• Foreign exchange risk• Liquidity risk• Default Risk or Counterparty Risk• Market Price not reflecting NAV
Practical uses of ETFs
Core satellite
Portfolio construction/ Diversification
Interim beta/ Transition management
Cash equitisation
Delta 1 alternative
Risk management
Portfolio construction/Diversification
Sectors and exotic markets
Implementing Core / Satellite Strategies
Active Strategy 2
Active Strategy 3 Active Strategy 1
ETFs
Implementing Core / Satellite Strategies
ETF Satellite
ETF SatelliteETF
Satellite
Portfolio
Strategic and tactical
• Strategic Model Portfolio
USA
Japan
Switzerland
Hong KongTaiwan
Malaysia
Israel
China
ColombiaEgypt
ChileBrazilIndia
Korea
Czech Republic
Russia
Thailand
Thematic Model Portfolio
Tactical Model Portfolio
Add short-term
views
Express thematic
views
For illustration purposes only.
Global Equity
Appendix
• List of ETFs listed on SGX
36
SGX ETFs offer a wide range of investment exposure87 ETFs covering the widest range of asset classes – Equity, Fixed income, Money market and Commodities
Single country:• Singapore• Malaysia • China• India• Japan• Korea• Philippines • Indonesia
Region:• ASEAN• Asia ex-Japan• Pacific• Emerging Market• Europe• Eastern Europe• Latin America• MSCI World
Style:• Short • Dividend
• Brazil• Taiwan• Thailand• US• Vietnam• Australia• Bangladesh• Pakistan
ASEAN
6 COMMODITY BASED ETFs6 MONEY MARKET ETFs10 FIXED INCOME ETFs
65 EQUITY BASED ETFs
Asian Sectors:• Consumer
Staples• Financials• Materials• IT•
Infrastructure• Real Estate
ASEAN
EMERGING MARKETS
EUROPE
LATIN AMERICA
• Thailand
• Brazil
• China
• India
• Indonesia
• Japan• Korea
• Malaysia
• Russia
Taiwan•
• USA
• Vietnam
Singapore •
Australia •
• Philippines
37
Multi-asset classes• Only Asian platform with the widest range of non-equity ETFs
Commodity Fixed Income Money Markets
6 COMMODITY ETFs on:
Broad Indices
• RJ/CRB Commodity Index
• RJ/CRB Commodity Non Energy Index
• DBLCI-OY Balanced USD Index
• DB Commodity Booster DJ-UBSCSI
• DB Commodity Booster Light Energy Benchmark ETF
Precious Metal• Gold
10 FIXED INCOME ETFs on:
• JP Morgan USD Asian Credit Bond Index
• Barclays USD Asian Local Currency 1-3 Year Bond Index
• Barclays USD Asian Local Currency Bond Index
• Barclays USD High Yield Credit Bond Idex
•iBoxx ABF Singapore Bond Index
• iBoxx ABF Korean Government Bond Index
• iBoxx € Sovereigns Eurozone TRN Index
• iBoxx $ Treasuries TRN Index
• USD IG Inflation Linked Sovereign
• Australia SSA Bond UCITS ETF
6 MONEY MARKET ETFs on:
• US Dollar Money Market – Fed Fund Effective Rate Total Return Index
• EONIA Total Return Index
• AUD Money Market (in AUD, USD & SGD)
• SORA Total Return Index
38
Fixed Income
• ABF Singapore Bond Index Fund
• iShares Barclays Capital USD Asia High Yield Bond Index ETF
• iShares J.P Morgan USD Asia Credit Bond Index ETF
Country & Regi
on Equit
y
• db x-trackers FTSE China 50 UCITS
• db x-trackers MSCI Brazil Index UCITS
• db x-trackers MSCI China Index UCITS
• db x-trackers MSCI Korea UCITS
• db x-trackers MSCI Malaysia Index UCITS
• db x-trackers MSCI Philippines IM Index UCITS
• db x-trackers MSCI Singapore IM Index UCITS
• db x-trackers MSCI Taiwan Index UCITS
• db x-trackers MSCI Thailand Index UCITS
• iShares MSCI India index ETF
• Nikko AM Singapore STI ETF
• SPDR Straits Times Index ETD
• CIMB FTSE ASEAN 40 ETF
• CIMB S&P Ethical Asia Pacific Dividend ETF
• db x-trackers MSCI Pacific Ex Japan Index UCITS
Commodit
y
• SPDR Gold Shares
19 EIP ETFs
39
Regional Coverage of 12 Asian-focused EIP ETFsTwelve of the 19 ETFs
Total Return of 24.6% over 3 years
Source: SGX Mygateway
40
Choice ETF Platform in Asia for Market Access
International listing and trading platform in Asia– 3rd largest market share of 21% on turnover of
non-domestic ETFs in Asia – 87 ETFs on an efficient platform allowing asset
allocation or just market access via one platform
Mix of international and regional retail investors– Predominantly institutional investors with good
growth momentum in retail segment– STI ETFs offered under Regular Shares Savings
Plan by POSB, Phillip Securities and OCBC
Presence of Designated Market Makers to provide on-screen liquidity
– Average spread of 30-50 bps with decent size– Flexibility of executing large orders via married
trades
Facts
Daily Traded Value: S$10m
Total no. of listed ETFs: 87
Total AUM: US$3.5 billion
Top 5 ETFs by turnover
• iShares MSCI India ETF
• SPDR Gold Shares
• DBXT MSCI AC Asian Ex Japan Index UCITS ETF
• DBXT MSCI Indonesia Index UCITS ETF
• SDPR Straits Times Index ETF
Daily summary of the trading volume and last sale price of the 19 EIP ETFs on
Straits Time Business section.
Welcome to SGX 41
Welcome to SGX 42
Welcome to SGX 43
This presentation is being made available to certain authorized recipients for their general information only.
While SGX and its affiliates have taken reasonable care to ensure the accuracy and completeness of the information provided in this presentation, they will not be liable for any loss or damage of any kind (whether direct, indirect or consequential losses or other economic loss of any kind) suffered due to any omission, error, inaccuracy, incompleteness, or otherwise, any reliance on such information. Neither SGX nor any of its affiliates shall be liable for the content of information provided by or quoted from third parties. Examples provided are for illustrative purposes only. The information in this presentation is subject to change without notice.
Any recirculation, transmission or distribution of this presentation or any part thereof by any third party requires the prior written permission of SGX. SGX and its affiliates disclaim all responsibility and liability arising in connection with any unauthorised recirculation, transmission or distribution of this presentation or any part thereof.
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Welcome to SGX 44
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