According to the world’s most successful investor Warren Buffett, index investing makes the best ‘retirement sense’. Warren Buffett believes that investing in indices, through low-cost index funds or exchange traded funds (ETFs), will outperform every other stock-picking strategy one can find on the market. So, if you are looking for a simple retirement savings plan, why not consider indices? And if you are considering investing in indices, investing in something closer to home is a good place to start, i.e. our own Straits Times Index (STI)?
We understand that not every reader is familiar with the STI. So, we prepared a four-item primer to help you understand the STI.
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1. What is the STI?
The STI is a blue-chip index that is used to gauge the general market performance in Singapore. STI tracks the performance of the top 30 companies listed in SGX. If you are familiar with the Dow Jones or Hang Seng Index, STI is the Singapore-equivalent of those indices.
STI is a capitalisation-weighted stock market index that consists of the 30 largest market cap companies in Singapore. The capitalization-weighted approach means that larger components carry higher percentage weightings. Conversely, smaller components in the index have lower weightage.
2. Not every STI constituent is made equal
While the STI might sound like a broad-based index, it is skewed towards the financial sector. Around 30% of the STI index performance is determined by the big three banks in Singapore, i.e. DBS, OCBC and UOB. The next biggest sector within STI is real estate (~18%), followed by industrial goods and services (~12%) and telecommunications (~10%).
Interestingly, although STI tracks the 30 largest companies on the SGX, the top ten constituents make up around 70% of the total STI index.
3. STI reserve list: The backup to replace any STI component
So, are the STI components permanent? The STI is reviewed every quarter to review whether the components should be amended. If a component stock needs to be replaced, it will be replaced by one of the five stocks in the STI Reserve List.
Even if you hadn’t been following the stock market, you would have heard of these five household names: Noble, NOL, COSCO, Olam and F&N. These five names were once the darlings of investors and were part of the “original” STI. However, these stocks are no longer part of the STI today.
Noble is probably the most infamous among these five names. A few years ago, Noble was attacked by short seller Muddy Waters. Noble’s share price dipped from its peak of $1.47 to today’s share price of $0.39. With the evaporation of its share price, Noble fell out of the top 30 of the STI. Noble was subsequently replaced by CapitaLand Commercial Trust, one of the five on the STI reserve list at that time.
And way before the Noble-Muddy Waters saga, Olam was the first victim of short seller Muddy Waters. The Singapore commodities trader was attacked by Muddy Waters with a critical report on the danger of insolvency. Following Muddy Waters’ attack, Temasek took Olam under its arm and privatised them. Olam was then delisted from the STI. Following its delisting, Olam was replaced by a then-STI reserve list component, i.e. UOL.
The STI reserve list acts as a back-up ready to replace any companies in the STI that falls out of the top 30. This can either be due to privatisation or a fall in its market cap. The current STI reserve list comprises of the five largest market cap stocks after the STI blue chips. They are Suntec REIT, Keppel REIT Mapletree Commercial Trust, Sembcorp Marine and Yanlord Land.
4. STI vs CPF OA returns: STI is the clear winner
Investing in the STI might not sound as sexy as investing in Apple, Google or Alibaba. But in terms of investment returns, STI gives a decent return.
Most of you are familiar with Central Provident Fund (CPF) and its guaranteed annual return of 2.5%. For every dollar placed in your CPF Ordinary Account (OA), you receive an annual return of 2.5% at the end of the year. But did you know that the STI would have given you much higher returns than the CPF had you been vested?
Over the past two decades, STI emerged as a clear winner against the CPF. In the 5-year period since 2012, STI returned 2.15% (without dividends) and 5.19% (with dividends) per annum. On a longer timeframe ( the 15-year period since 2002), STI returned 4.12% (without dividends) and 7.27% (with dividends) per annum. These returns are at least twice the returns guaranteed by our CPF OA!
Getting ready to invest in STI?
While you cannot directly own the STI, you can invest in STI through two ways.
First, you can invest in ETFs that replicate the components of STI. An STI ETF can be bought or sold on the open market, just like how you would buy and sell any stock. Right now, there are two ETFs listed on the Singapore Stock Exchange (SPDR STI ETF and Nikko AM STI ETF).
Second, you can invest in funds that replicate the components of STI. The key difference between funds and ETFs is the cost where funds tend to charge a higher fee compared to ETFs. Keep a look out for our upcoming beginner’s guide to investing in ETFs!
We hope this article has helped you understand the STI more. You may also want to check out what are the things you need to start investing, as well as what are the mental biases that investors are often influenced by.